This paper provides two analytic approximation formulas for pricing ratchet caps in the LIBOR market
model. The approximate values of a ratchet caplet are represented as sums of Black’s (1976) regular
caplet prices. So, these pricing formulas are extremely fast and easily implemented. The formulas can be
easily extended to incorporate multiple factors. Illustrative numerical examples are provided and
comparisons with results from Monte-Carlo implementation of the LIBOR market model are presented.
