Market participants use negative interbank rates (LIBOR JPY/CHF) for the valuation of FX futures. Does this make any economic sense? Positive rates in valuation formula indicate opportunity cost of money, but since rates are negative, are there any "opportunity" to be accounted for?

Naive way to ask: Why not just set negative rates to zero for the purpose of FX future valuation only (I could NOT lend cash at negative rate if I want so => my interest is zero)? Who could prohibit market participants doing so and hence change a valuation framework?

Serious way to ask: If market participants are doing so => it is adequate. So, what are the "building blocks"/foundations of such adequacy? Where it lies in case of FX futures valuation under negative rates: in banking regulation/conventions/assumptions/arbitrage portfolios?

Thanks a lot

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    $\begingroup$ fx futures are priced under a non-arbitrage parity argument. since banks can and must lend at negative rates (in some currencies e.g. EUR) that is the correct theoretical price. any other price is to introduce an arbitrage. $\endgroup$
    – Attack68
    Feb 23, 2021 at 11:12

1 Answer 1


But the point about neg rates is precisely that you CAN lend and borrow thus. EURIBOR, CHF and JPY LIBOR etc forwards trade >100. So arbitrarily assuming zero rates and thus pricing the forwards at 100 would generate an arbitrage, spoon-feeding others a free lunch. Nobody prohibits or enforces the FX markets to price in any way. FX will just price itself to be consistent with these, positive, negative, or 100bps different every day of the week if that's what the rates forwards want to do.

Something like $17tr of govvie paper trades at negative yields (a quarter of the bond market, or thereabouts). Lord knows how much has been traded in IR swaps at almost equivalent rates, representing real-world borrowing and lending below zero.

The lesson learned last decade is that the "zero lower bound" is an oxymoron, or at least of exaggerated importance. We were all understandably were wary of the experiment trying to cross this... cue Ghostbusters "crossing the beams" memes, or the intro sequences of any number of zombie movies. But Japan, Switzerland and Germany went negative, and stayed there. Ireland went negative (we smirked). Italy went negative (we all thought this represented some kind of sick joke, but it happened).

The "economic intuition here" is two-fold. Theoretically, one can argue that there should be some kind of equilibrium interest rate, that one could then expect to be biased positive. But why this should be nominal rather than real, versus a Wicksellian natural rate, let alone an "r-star" real natural zero, is up for discussion. Assuming in the first places these alternatives were even measurable in the first place, which they are not...

More practically, the objection to neg-rates was assumed to be that savers might avoid these by converting bank balances into banknotes; and then cashing them back in. Except you'll get reported for trying to spend 10,000 on a car with paper cash. Try buying a house with a suitcase of cash. I dare you ;-) Turn up with 100m in banknotes, and I promise the bank's regional AMLO (anti money laundering officer) will become more intimate with your financial affairs than your spouse.

The prosaic reality is that the investors who most hated negative skipped out of govvies and into credit and/or stocks, which was precisely the "portfolio channel" effect that the central banks were trying to achieve in the first place. Those wannabe "eat what you kill" bond vigilantes went veggie-lentil...

  • $\begingroup$ +1, I laughed :) $\endgroup$
    – Bob Jansen
    Feb 23, 2021 at 11:49

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