Incl Missing CapFlrs
Key Incl Missing CapFlrs in CapFlr Vol Spec refers to an optional boolean that determines how the optionlet vols are calculated during the calibration process.
It applies only if Sparse CapFlr Vols = false
The default is FALSE, which means that no other calibration instruments, i.e. caps/floors, are assumed other than those supplied as input to the Vol Curve object through the keys Vol Table and - if ATM vols are also included - Vol Set.
Then the last optionlet of each calibration instrument plays a pivotal role, since its assumed vol at each stage of the iteration process acts as independent variable that determines through interpolation the not-yet-determined vols of all previous optionlets.
If set to TRUE, the initial set of calibration instruments is expanded to include all caps/floors of all possible lengths up to the longest given cap/floor, with the same common optionlet period.
Then each inserted cap/floor is assigned a vol quote calculated by applying the two-dimensional interpolation specified in CapFlr Interp2D on the given market vol quotes of the initial calibration instruments.
Effectively, the number of calibration instruments increases and the new entrants are ascribed an interpolated "market" quote.
For example, if the market input consists of the vols of two quarterly ibor caps with lengths 1 year and 2 years respectively, then the vols of the 6M, 9M, 15M and 18M caps are added to the set of assumed market input data.