period is usually identical for all the caplets in a cap. As an illustration, lets utilize Bloombergs Cap, Floor, Collar Calcula- tor presented in Exhibit 12.17. Consider a hypothetical one-year cap on three-month LIBOR with a strike rate of 3%. The settlement date for the agreement is November 30, 2001 and the expiration date is November 30, 2002. The first reset date is February 28, 2002, which is labelled "Start" in the top center of the screen. If three-month LIBOR is above the strike rate on this date, say, 3.5%, the payoff of the cap assuming the notional principal is $1,000,000 is computed as follows:     $1,000,000 ´ (3.5% - 3.0%) ´ 92/360 = $1,277.78   This payment is made on May 31, 2002. Note that the day count conven- tion is Actual/360 in the US markets and Actual/365 in the UK. The sec- ond reset date is May 31, 2002 for which payment is made, if necessary, on August 31, 2002. Finally, the third reset date is August 31, 2002 for which payment is made, if necessary, on November 30, 2002. As noted above, each cap can be thought of a series of call options or caplets on the underlying reference rate in this case, three-month LIBOR. The first caplet expires on the next reset date, February 28, 2002; the sec- ond caplet expires on May 31, 2002, and so forth. Accordingly, the value of the cap is the sum of the values of all the caplets. In the "PRICING" box, the "Premium" represents the value of our hypothetical cap as a per- centage of the notional amount. For our hypothetical cap, the premium is 0.1729% or approximately $1,729. Exhibit 12.18 presents Bloombergs Caplet Valuation screen that shows the value of caplet in the column labelled "Component Value." Bloomberg uses a modified Black-Scholes model to value each caplet and users can choose whether to use the same volatility estimate for each caplet or allow the volatility for each caplet to differ. Binomial lattice models are also extensively in practice to value caps.     Floors It is possible to protect against a drop in interest rates by purchasing a floor. This is exactly opposite of a cap in that a floor pay outs when the reference rate falls below the stike rate. This would be used by an institution that wished to protect against a fall in income caused by a fall in interest rate- for example, a commercial bank with a large proportion of floating-rate assets. For the floor buyer, the payoff at a reset date is as follows if the value of the reference rate at the reset date is less than the floor rate:   Notional amount ´ (Floor rate - Value of the reference rate) ´ (Number of days in settlement period/Number of days in a year)