A Practical Guide to Strip Caplet Volatilities

Battle Count: 65

Highly relevant for interest rate derivatives trading desks, particularly for cap/floor pricing, hedging, and LMM calibration. The practical workflow and algorithmic implementations are directly applicable to production systems. However, it is more relevant to fixed income derivatives specialists than to general quantitative trading strategies. The outlier detection and arbitrage checking components are broadly useful for any derivatives pricing pipeline.

The paper presents a graduated complexity: basic time-value checks and modified Z-score outlier detection are straightforward (score 3-4). The sequential bootstrap with flat-linear/flat-smooth interpolants is moderate (score 5). The global solver with midpoint nodes, Levenberg-Marquardt optimization, and positivity-preserving Hyman spline filtering is more complex (score 7-8). The corrected Hyman filter implementation and handling of non-uniform grids add additional complexity. Julia code snippets are provided for key components.

The paper provides detailed algorithms in pseudocode (Algorithm 1 and 2), Julia code snippets for outlier detection (Listing 2) and total variance check (Listing 1), complete market data in Appendix B (Libor 1M Feb 2022 cap vols, OIS discount curve, Libor 1M zero rates), and corrected Hyman non-negative filter implementation in Appendix H. However, no GitHub repository is linked.