A company buys a caplet today (time 0)with maturity T = 1 year and a strike rate of k = 3 percent on a notional of L N = $200 million.Suppose the six-month bbalibor rate realized after one year is 4.5 percent.Assume that there are 181 days in this six-month period and the year has 365 days.
-Which of the following inputs into the HJM libor model caplets formula are NOT easily observable?

Question

Quizplus · Accepted Answer

The average forward rate volatility is not directly observable in the market and typically requires estimation or modeling, unlike the other options which can be directly observed or calculated from market data.

A Company Buys a Caplet Today (Time 0)with Maturity T