Hi all, In interest rate derivatives trading such as caps, swaption, one often encounters the terminology "forward volatilities". But there have been so many meaning provided around. Some say it is the vols appearing the LMM model for forward rates. Some say it is the vol needed to input to the Black"s formula for producing the cap price at a certain maturity. Can anyone what is the meaning that most interest rate practioners refer to?Also, one senior was telling me caplets are considerably insensitive to foward vols while Bermudan swaptions are extremely sensitive to forward vols. Can the expert guess what are the forward vols this senior is referring to and how to understand his statement??many thanks in advance,TW

QuoteAlso, one senior was telling me caplets are considerably insensitive to foward vols while Bermudan swaptions are extremely sensitive to forward vols. Can the expert guess what are the forward vols this senior is referring to and how to understand his statement??This is analagous to the forward rate you bootstrap from a swap curve. From a spot volatiility surface you bootstrap the forward vols to reach the no arb forward vol. i.e. 1y2y swaption vol is x, 1y1y swaption vol is y, if you want 1y1y 1y forward swaption vol then you can use a not so simple formula to work it out. The result is dependent on the model used for IR dynamics; notably mean reversion and correlation.This is the only type of forward vol I am familiar with in the rates market. Maybe I don't understand the things you are describing in the first part of your post, but they all seem to be things that you can see on the spot vol surface.