question about single factor model

carriechen · April 28th, 2003, 3:17 am

Why in single factor model we can think an option on cap as a portforlio of compound option?How to show it formally?

Pat · April 28th, 2003, 12:04 pm

Since a cap is equivalent to a portfolio of options (each caplet is equivalent to a put on the corresponding 3m rate). So having an option on a cap is clearly an option-on-a option. But I don't understand your request to show this formally ... this depends on the formalism

carriechen · April 28th, 2003, 2:44 pm

Yeah. I know what you were saying are correct, but how can we find a strike price to make them equivalent?Do you know any paper talking about this idea?QuoteOriginally posted by: PatSince a cap is equivalent to a portfolio of options (each caplet is equivalent to a put on the corresponding 3m rate). So having an option on a cap is clearly an option-on-a option. But I don't understand your request to show this formally ... this depends on the formalism

carriechen · April 28th, 2003, 2:44 pm

Yeah. I know what you were saying are correct, but how can we find a strike price to make them equivalent?Do you know any paper talking about this idea?QuoteOriginally posted by: PatSince a cap is equivalent to a portfolio of options (each caplet is equivalent to a put on the corresponding 3m rate). So having an option on a cap is clearly an option-on-a option. But I don't understand your request to show this formally ... this depends on the formalism

carriechen · April 28th, 2003, 2:44 pm

Yeah. I know what you were saying are correct, but how can we find a strike price to make them equivalent?Do you know any paper talking about this idea?QuoteOriginally posted by: PatSince a cap is equivalent to a portfolio of options (each caplet is equivalent to a put on the corresponding 3m rate). So having an option on a cap is clearly an option-on-a option. But I don't understand your request to show this formally ... this depends on the formalism

carriechen · April 28th, 2003, 2:44 pm

carriechen · April 28th, 2003, 2:46 pm

I am sorry that I sumbitted several times, I am new here.Who can tell me how to delete them?Thanks

greghm · April 30th, 2003, 9:42 am

I dunno how to delete that, it's not really important since the times you posted them are the same

Pat · April 30th, 2003, 11:49 am

To price the caption, one would have to calibrate an interest rate model (HW for example) on the caplet prices.I'm not sure of the reference to a strike