Hi Everyone,

I saw this interview question on scribd. I am not sure how to proceed with this question. Can anyone please offer me some hints? Thanks in advance.

--------------------------------------------------------------------------------------

Consider a 1x2 swaption and a cap. The cap under consideration is a strip

of two one year caplets, one expiring a year from now, the other expiring

in two year’s time. Comment on the Black vol of the swaption relative

to the Black vol of the cap under the assumption that forward rates are

correlated. Which is higher?

---------------------------------------------------------------------------------------