Cap Stripping Documentation


#1

I was curious to know how caplet vols are stripped from cap maturity vols. I didn’t see any mention in the quantitative documentation http://docs.opengamma.com/display/DOC/Quantitative+Documentation

Things I was curious about are;
Can you deal with different index tenors at shorter maturities, perhaps by stripping out bpvols
Can options on futures be included
Can ATM caps be used for markets where there are no smile quotes

Gary


#2

I have looked at this in the past, but it wasn’t a high priority task at the time, so there is no production code for this. Broadly the idea is from Andersen and Piterberg (book 3) - basically you use a smile model such a SABR for the (unknown) caplet volatilities and assume an interpolated term structure of parameters with nodes at cap maturities. You then root find to reprice the caps and hey presto you have caplet volatilities. There’s nothing wrong (in principle) with throwing other instruments into the mix. For a smile-free world, the problem is simpler as you only have one (time dependent) parameter - the ATM vol.


#3

Linking to a related Jira for reference: http://jira.opengamma.com/browse/PLAT-3306