PT  - JOURNAL ARTICLE
AU  - John C Hull
AU  - Alan D White
TI  - Forward Rate Volatilities, Swap Rate Volatilities, and Implementation of the LIBOR Market Model
AID  - 10.3905/jfi.2000.319268
DP  - 2000 Sep 30
TA  - The Journal of Fixed Income
PG  - 46--62
VI  - 10
IP  - 2
4099  - https://pm-research.com/content/10/2/46.short
4100  - https://pm-research.com/content/10/2/46.full
AB  - This article presents a number of new ideas concerned with implementation of the LIBOR market model and its extensions. It develops and tests an analytic approximation for calculating the volatilities the market uses to price European swap options from the volatilities used to price interest rate caps. The approximation is very accurate for the range of market parameters normally encountered, and enables swap option volatility skews to be implied from cap volatility skews. It also allows the LIBOR market model to be calibrated to broker quotes on caps and European swap options so that other interest rate derivatives can be valued.