February 27th, 2022, 9:22 pm
Yeah it's probably worth elaborating on it a little bit more... So I'm talking about a market where there is only one significant market maker providing indicative quotes for caps/floors and there are usually no more than 2-3 trades made per week, so there is no opportunity to calibrate a model to real trades. The interest rate was roughly 5% and the market maker was providing quotes for 4% floors as well as ATM, 6%, 8%, 10% caps. However due to the global inflation current ATM is already set at 12-13% with fixed strikes staying the same, i.e. 6%, 8%, 10% caps are ITM and 4% floor is OTM.