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Volatilities in caps!
I try to price caps and floors. I have used the market model and a trinomial tree suggested by Hull-White. I have problem with understanding volatilities. In the Market model or Blacks formula I use a yearly volatility of 24 % and multiply with square rot of time. Then I try to convert this volatility into the Hull-White model. There are two inputs for volatility in this model, a, a mean reversion level and sigma the volatility of the diffusion part. I do not see the connection/ the formula between these two ways of modeling volatility?? Can someone help me?
Last edited by mossin on November 23rd, 2003, 11:00 pm, edited 1 time in total.
Volatilities in caps!
Iterative calibration is a numerical algorithm or procedure which chooses the short rate vol and mean reversion rate such that squared errors between actual prices and modelled prices are minimised.