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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).

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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.

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  • $\begingroup$ Setting the rates to zero would be the first instinct. Thanks! $\endgroup$ – Eli Jan 9 '13 at 14:30
  • $\begingroup$ matt, could you please post a link to the Haug paper? $\endgroup$ – gt6989b Mar 22 '16 at 17:00

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