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).
Tell me more
×
Quantitative Finance Stack Exchange is a question and answer site for
finance professionals and academics. It's 100% free, no registration required.
|
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. |
|||
|
|
