In an annual-pay cap, the Black volatilities for caplets with maturities 1, 2, 3, and 5 years

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In an annual-pay cap, the Black volatilities for caplets with maturities 1, 2, 3, and 5 years are 18%, 20%, 22%, and 20%, respectively. Estimate the volatility of a one-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 to estimate flat volatilities for 2-, 3-, 4-, 5-, and 6-year caps.

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Options Futures And Other Derivatives

ISBN: 9780130090560

5th Edition

Authors: John C. Hull

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Question Posted: Oct 18, 2024 07:03 AM

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In an annual-pay cap, the Black volatilities for caplets with maturities 1, 2, 3, and 5 years

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