Hi allWhen do valuation for a cap contract,if position date(today) is in the middle of one caplet,then how to shift the caplet volatility surface constructed today?Best,

Your question is not clear. Are you asking how to interpolate?

QuoteOriginally posted by: MartinghoulYour question is not clear. Are you asking how to interpolate?That's probably already the answer: interpolate.

To elabrate,suppose i bought an 3M cap on 17/02/2013 and i want to do valuation today 04/06/2013.the first caplet starts at 17/05/2013 and the maturity is 17/08/2013,the seconed caplet starts at 17/08/2013 and maturity is 17/11/2013,......(no rate set date or business day convention )From today's caplet volatility surface i can see:the vol for 04/06/2013 to 04/09/2013 is 60%the vol for 04/09/2013 to 04/12/2013 is 50%......For instance,vol 50% can not be used to price the second caplet. You mentioned interpolation would work.May i ask how to do it ?I presume this is a standard problem,so maybe there is a standard way to interpolate?Best,

Yeah, so just interpolate linearly, in the most straightforward fashion...

I haven't read this thread, but just wanted to say that one usually interpolates variance not vol. Apologies for stating the obvious.P

Thanks. may i also ask how you bootstrap ATM caplet vol from caps vol.I noticed people say that i can first bootstrapping for fixed strikes and get a table of caplet vol,i.e. strike/maturity.Then simply interpolate into it to get ATM vol.But the problem is,say the ATM strike is 0.21%(rates are low nowadays),and the qouted strike range is 1%,1.5%2%,2.25%,3%,3.5%,4%,4.5%,5%,6%,7%,10%,then interpolation doesn't really help.Best,

Well, tbh, if you don't have a strike that you need, it really doesn't matter how creative you get. I mean you can fit some sort of a model or you can trivially linear interpolate (in your case between 1% and 0%), but the end result is likely to have the same degree of arbitrariness, IMHO. In general, I find it a little strange that you can't get a price on a lower strike instrument that would allow you to get the vol. Can't you get a price for a 0% floor?

yeah,i should try to get more strikes and prices.But still,ATM are actively traded and i would like to directly use this data instead of doing interpolation,or are you saying interpolation will give the same result,i.e. interpolate between 0% and 1% will give what market says about 0.21%?also what about bootstrapping directly at ATM cap vol to get ATM caplet vol?i know the fact they have different strikes for different maturities,but...

Interpolation probably won't give you the same result... I am just trying to say, simply, that "a man's gotta do what a man's gotta do". The data that you have available will determine the steps you have to take.

You are right tho...