I am trying to get an overview of the impact on negative interest rates on financial products (in general). For the time being I distinguished the following products
- Vanilla options
- Exotic options
- Interst rate swaps
- Currency swaps
For each of these I would like to pinpoint the general issues. If someone has one of these products I would immediately like to tell them, "hey, have you looked at these possible issues?". For now I have seperated the issues into three categories:
1) Modeling issues 2) Legal issues (think of CSA contracts that are still fairly ambiguous) 3) System issues (e.g. banking systems that are not capable of implementing negative rates).
This being a forum on quantative finance, I am here to ask you about the modeling issues.
The modelling issues of which I am aware are:
- For vanilla options on the interest rate (e.g. swaptions), one frequently uses Black's formula or the SABR model. Both of these assume lognormal distributions, such that negative rates would nog be accepted.
- For exotic options it is common to apply numerical methods for pricing. To this end a proper interest rate model should be applied (e.g. lognormal models are no longer accepted).
I am sure that there are many more issues, would you like to help me make a more complete list? Thank you for your help!