RE:Delta on Capfloor

Posted by Andre Louw-2 on Oct 21, 2002; 2:37am
URL: http://quantlib.414.s1.nabble.com/RE-Delta-on-Capfloor-tp2259.html

Hi all,

I'm still trying to get behind the total delta on a capfloor. To recap, the
delta on a capfloor should relate back to the RATIO between it's sensitivity
and that of a swap with an equivalent structure. Using the
example Xavier gave:

> The sensi of a 5Y 100 M swap at the break even is
> rougthly 45 000, the sensi of a 5Y 100M cap at the same strike is 2 times
less: 22 500 because
> here the delta is 0.5.

On the same note, a deep in the money cap's sensitivity tends closer and
closer to that of the swap's (1.0).

The answer given originally to my question on calculating the delta on a
capfloor structure was that it is simply the sum of the delta's on all the
caplets (assuming flat nominals, there is no weighting needed). Thinking
about it, this does not really make sense.

e.g I have a 3Mx12M, 3 monthly cap, which results in 3 caplets, results as
follows:

the 1st strikes at a delta of 0.6, the 2nd strikes at a delta of 0.5, the
3rd at a delta of 0.4. Summing these gives 1.5!
Ok, maybe it's on the Delta with respect to spot: the above caplets gives
0.13, 0.11, 0.08, giving a total of 0.32, (doesn't 'feel' right!), depending
on the termstructure and the length of the cap, the sum of the spot-delta's
quite often goes over 1.0!

What am I missing?

Any help appreciated.

Andre
 
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