April 9th, 2016, 3:24 pm
at least for the major currencies there are quotes for fixed strikes like 1%, 2%, ... (or nowadays -1%, -0.5%, 0%, 0.5% ...), which can be used for bootstrapping; you can then place the atm caplets in between those fixed strikes and interpolate in strike direction for bootstrapping from the atm flat volatilityif you price a series of spot caplets similar to the quoted market instrument it won't matter too much, if you use the flat vol for each caplet or the bootstrapped vols (by construction), but think about a situation where you price a single caplet with fixing in 5y, its volatility may have little to do the the average (flat) vol of the caplets with fixings 3m, 6m, 9m, ... 4y, 4y3m, 4y6m, 4y9m, 5y (if we are talking about a 3m index for example)