Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

How would you handle a negative interest rate in index/equity options valuation?

An example would be negative rates for short term maturities for Swiss Frank (CHF).

share|improve this question
up vote 2 down vote accepted

A realistic alternative is to set all CHF rates out till 3 months equal to zero. The differential is so insignificant that for practical pricing valuation purposes it makes zero difference.

Please note that I am in particular talking about the valuation of index/equity options such as you indicated.

But even plugging negative rates in should work fine for BS-models (read a paper on that by Espen Gaarder Haug). However, you need to be more careful when working with interest rate models. Some are not happy with negative rates.

share|improve this answer
Setting the rates to zero would be the first instinct. Thanks! – Eli Jan 9 '13 at 14:30
matt, could you please post a link to the Haug paper? – gt6989b Mar 22 at 17:00

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.