I came across the website in search of the author of riskencyclopedia.com. Apologies in advance if this is not the right forum for that contact.
I was hoping to pose a question regarding the definition of an Interest Rate Cap on the site.
Why, in the exhibit shown, is the time series of cash flows made under the example set in arrears? I appreciate payments are made in arrears, but market convention (and pricing convention) is ref. rate set in advance.
Should the second payment not be $0 given the interest rate at 6 months (i.e., the 2nd fixing time), was less than the strike?
I have heard some other market practitioners structure “in-arreas” caplets, but especially since you reference Black-76, I would have thought the example is more appropriate with cashflows in advance unless I’m missing something…
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