Before revision:  Here we discuss the implications of these results for the pricing of interest rates derivatives. We point out the presence of nonanalyticity effects in other quantities of the model, focusing on the properties of the Libor probability distribution function in a measure in which it is simply related to caplet prices. We show that the moments of this distribution function have nonanalytic dependence on the volatility , which are also similar to a phase transition. We study in some detail the pricing of caplets on Libor rates and Libor payments in arrears, and show that the convexity adjustment for the latter is also nonanalytic in the model volatility .
After revision:  Here we discuss the implications of these results for the pricing of interest rate derivatives. In the large volatility phase, certain expectation values and convexity adjustments have an explosive behavior. For sufficiently low volatilities the caplet smile is log-normal to a very good approximation, while in the large volatility phase the latter is also nonanalytic in the model volatility .