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caperover
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Joined: June 25th, 2005, 4:54 pm

Inflation cap/floor expiry time

September 27th, 2019, 1:29 pm

An inflation cap/floor involves fixing date, publication date, payment date, etc. In order to calculate the implied volatility assuming either a Black or Normal model, what is the right way to calculate the expiry time, for example, in Bloomberg? Thanks!
 
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pcaspers
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Joined: June 6th, 2005, 9:49 am

Re: Inflation cap/floor expiry time

September 27th, 2019, 6:46 pm

I'd say the time between today and the publication date measured w.r.t. the implied vol's day count convention (probably A365?).
 
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caperover
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Posts: 285
Joined: June 25th, 2005, 4:54 pm

Re: Inflation cap/floor expiry time

September 30th, 2019, 3:38 pm

Thanks for your reply. I have been trying many different ways, but that does not seem to be what is used in practice. For example, assume the curve date is 4/15/2019, the last publication date is 3/11/2019, the last fixing date is 2/1/2019, the option payment date is 4/17/2020 with corresponding fixing date 1/17/2020 and publication date 3/10/2020. The time to expiry for this 1Y Cap in BBG is 9.5 month. I cannot figure out a reasonable way to explain that.
 
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bearish
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Re: Inflation cap/floor expiry time

September 30th, 2019, 11:12 pm

Help Help and ask to escalate to the A-desk. 
 
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pcaspers
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Joined: June 6th, 2005, 9:49 am

Re: Inflation cap/floor expiry time

October 3rd, 2019, 11:30 am

Of course you can absorb different way to measure the time to expiry in the implied volatility, but as a minimum requirement the time to expiry needs to go to zero when you move towards the fixing publication date when the payoff gets deterministic.

I wouldn't spend too much time trying to reverse engineer what is going on, just ask them as bearish suggests. Maybe it just doesn't make sense or is a bug...
 
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caperover
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Posts: 285
Joined: June 25th, 2005, 4:54 pm

Re: Inflation cap/floor expiry time

October 7th, 2019, 5:39 pm

Thank you both for your suggestions. The time to expiry is used only for the purpose of implied vol. As Pcaspers pointed out, as long as it meets the minimum requirements and makes sense, the actual convention does not matter too much. Thanks again.
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