GEORGE L. ALBOTA
DirectorCapital Markets/Market Risk ManagerBank of America Merrill Lynch, London
RADU S. TUNARU, PH.D.
Professor of Quantitative FinanceUniversity of Kent, Business School
Caps and floors and their twin instrument swaptions have become the main interest rate derivatives in fixed income markets. In this chapter, we discuss these important derivatives, trying to offer some insights without delving into complex mathematical modeling. We start by first describing caps and floors, their hybrid products and their potential applications. Then we consider some simple but still robust pricing considerations based on Black’s formula for caplets and floorlets, the main components of caps and ...