There is a better Gaussian model that allows calibration without trees. See Andersen and Piterbarg 'Interest Rate Modeling, Volume 2' Chap 12.

Definite candidate for Nvidia's CUDA.J.

Brings back old memory circa early 90's. Here is a part of my dissertation on binomial lattice with tree pruning.J.

<t>BS model assumes that the economy is spanned by only two assets: a risky stock and a savings account that grows at risk-free rate, i.e. a complete market with one source of risk. Then, all other assets are derivatives of these two fundamental assets and their payoffs can be replicated with stocks...

So, ATM Cap doesn't mean that the starting value should equal strike for each caplets.Thanks.

<t>Here is exact quote from the book:QuoteBrokers provide tables of flat implied volatilities for caps and floors. The instruments underlying the quotes are usually at the money. This means that the cap/floor rate equals the swap rate for a swap that has the same payment dates as the cap.This seems ...

<t>In page 623 of Hull 6th edition, it is stated that dealers usually quote ATM cap with flat vol where cap rates are equal to the swap rate of the same payment dates.Suppose we want to calculate cap price with 1 year expiry and 3 month tenor. For caplets of each tenor we use 1 year swap rate as str...