Abstract
In this paper we analyse the pricing of non-standard tenor caps and swaptions in the presence of multiple curves for Libor forecasting and discounting. Pricing of non-standard tenor vanilla options usually resorts to volatility information available for standard-tenor options. However, when applying this information to non-standard tenor derivatives interest rate spreads and volatility basis between tenors need to be taken into account.We aim at disentangling the effects of interest rate spreads and volatility basis for the pricing of non-standard tenor vanilla options. This allows us to justify the constant basis point volatility approach for swaptions. Moreover, we propose a volatility transformation for caplets that consistently takes into account deterministic tenor basis and de-correlation of interest rates which drives the volatility basis.
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