The optical response functions and band structures of LiCoO$_2$ are studied at different levels of approximation, from density functional theory (DFT) in the generalized gradient approximation (GGA) to quasiparticle self-consistent QS$GW$ (with $G$ for Greens function and $W$ for screened Coulomb interaction) without and with ladder diagrams (QS$Ghat W$) and the Bethe Salpeter Equation (BSE) approach. The QS$GW$ method is found to strongly overestimate the band gap and electron-hole or excitonic effects are found to be important. They lower the quasiparticle gap by only about 11~% but the lowest energy peaks in absorption are found to be excitonic in nature. The contributions from different band to band transitions and the relation of excitons to band-to-band transitions are analyzed. The excitons are found to be strongly localized. A comparison to experimental data is presented.