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Caption is an option on caps and floors. Since we can view cap as a call option and floor as a put option, caption can be modeled by compounding option techniques. There are four basic types: call option on cap, put option on cap, call option on floor, and put option on floor. Here we only explain how to value European or American call option on cap in details. Other three cases can be done in a similar way.
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Caption Model
Caption Model
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