Valuation models

Caplet vol stripping

Piecewise-constant caplet vols bootstrapped from flat cap quotes by maturity, at the money or at one strike, output as a term vol surface for caps, floors and range accruals.

Inputs

CurrencyCaplet frequency1Y cap volbp2Y cap volbp3Y cap volbp5Y cap volbp7Y cap volbp10Y cap volbpDiscount and projection curveDiscount and projection curve: flat rate% cc

Each cap at the money

Results

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Methodology

Conventions

Caps in order of maturity; the caplets each cap adds share one vol, solved so the cap reprices at its flat vol.
The first period fixes today and is in no cap.

References

Hull, Options, Futures, and Other Derivatives, ch. 29

Formulas

Strip: Σ c(Fᵢ, K, σᵢ) = Cap(σ̄)