In an annual-pay cap, the Black volatilities for at-the-mone
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In an annual-pay cap, the Black volatilities for at-the-money caplets which start in 1, 2, 3, and 5 years and end 1 year
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In an annual-pay cap, the Black volatilities for at-the-money caplets which start in 1, 2, 3, and 5 years and end 1 year later are 18%, 20%, 22%, and 20%, respectively. Estimate the volatility of a 1-year forward rate in the LIBOR Market Model when the time to maturity is (a) 0 to 1 year, (b) 1 to 2 years, (c) 2 to 3 years, and (d) 3 to 5 years. Assume that the zero curve is flat at 5% per annum (annually compounded). Use DerivaGem with LIBOR discounting to estimate flat volatilities for 2-, 3-, 4-, 5-, and 6-year at-the-money caps.
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