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I am trying to extract the implied volatility from options on Eurodollar futures. My understanding is that I should be converting the Underlying Price and Strikes to rates (S = 100 - FuturesPrice, K* = 100 - K) and then treating Calls as Puts & Vis-Versa. However - my question is how to deal with strikes on Eurodollar options > 100 bps - which lead to a negative K* strike.

My code cannot handle negative strikes because my pricing tree uses log() - I have researched online but there is a lack of literature / information around this method?

I am assuming I can apply some sort of shift model - but would like to know if anyone knows of any alternatives or roundabouts.

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  • $\begingroup$ an idea is to use a normal model rather than log-normal. $\endgroup$ – PeacePanda Oct 1 '19 at 0:12
  • $\begingroup$ yup, looks like that's the way to go. shouldn't be too difficult to implement, thanks @Kola $\endgroup$ – yungpadewon Oct 1 '19 at 14:56

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