In page 623 of Hull 6th edition, it is stated that dealers usually quote ATM cap with flat vol where cap rates are equal to the swap rate of the same payment dates.Suppose we want to calculate cap price with 1 year expiry and 3 month tenor. For caplets of each tenor we use 1 year swap rate as strike and 1 year flat vol quote. However, I am confused on what to use for time 0 starting value for each caplet. According to other examples in the book, caplet formula requires today's 3 month Libor rates for the maturities of 6, 9 and 12 month for starting values. Then, it is not ATM because the starting values in the formula are not equal to the strike.What is the market convention? Is there a separate market convention for spot vols, too? Any literature that fully explains this quoting convention?

Quotewhere cap rates are equal to the swap rate of the same payment dates.i haven't read the Hull edition you are referring to but it seems to me to be wrong.The input is the implied 3 month forward deposit rate from your curve. for a 3m cap starting in 3mth its the 3mth depo rate (annualised) 3 months forward.

Here is exact quote from the book:QuoteBrokers provide tables of flat implied volatilities for caps and floors. The instruments underlying the quotes are usually at the money. This means that the cap/floor rate equals the swap rate for a swap that has the same payment dates as the cap.This seems to describe some market convention of quoting the price that is different from how to use caplet formula correctly. Does any body have experience of trading ATM cap/floor contract?

QuoteOriginally posted by: jtkimHere is exact quote from the book:QuoteBrokers provide tables of flat implied volatilities for caps and floors. The instruments underlying the quotes are usually at the money. This means that the cap/floor rate equals the swap rate for a swap that has the same payment dates as the cap.This seems to describe some market convention of quoting the price that is different from how to use caplet formula correctly. Does any body have experience of trading ATM cap/floor contract?You're not interpreting the words of Hull correctly and Dave's right...

So, ATM Cap doesn't mean that the starting value should equal strike for each caplets.Thanks.