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Does anyone know if it is possible to evaluate swaptions with negative interest rates with Quantlib?

    blackEngine = ql.BlackSwaptionEngine(discountingTermStructure, ql.QuoteHandle(ql.SimpleQuote(vol)))
    swaption.setPricingEngine(blackEngine)
    swaptionnpv = swaption.NPV()

My vol value is an interpolated value from a volatility matrix which is equal to 0.34.

RuntimeError: forward + displacement (-0.00128788 + 0) must be positive

Thanks in advance

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  • $\begingroup$ Hi and welcome. Would you please add more details to your question, esp. the software (I guess it's QuantLib?) and the calling code? A pure guess: You use lognormal vols with negative rates? $\endgroup$
    – Kermittfrog
    Nov 12 '21 at 9:17
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    $\begingroup$ Edited, thank you. $\endgroup$
    – Jorge Gisbert
    Nov 12 '21 at 9:44
  • $\begingroup$ It's customary to use the bachelier normal model because the lognormal assumption of Black doesn't allow for negative values. $\endgroup$
    – AKdemy
    Nov 12 '21 at 12:02
  • $\begingroup$ Thank you very much! $\endgroup$
    – Jorge Gisbert
    Nov 12 '21 at 12:17
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Here is an example on pricing the the Bachelier model (Normal vols):

import QuantLib as ql

yts = ql.YieldTermStructureHandle(ql.FlatForward(2, ql.TARGET(), 0.05, ql.Actual360()))

calendar = ql.TARGET()
today = ql.Date().todaysDate()
exerciseDate = calendar.advance(today, ql.Period('5y'))
exercise = ql.EuropeanExercise(exerciseDate)
swap = ql.MakeVanillaSwap(ql.Period('5y'), ql.Euribor6M(yts), 0.05, ql.Period('5y'))
swaption = ql.Swaption(swap, exercise)


bachelierEngine = ql.BachelierSwaptionEngine(yts, ql.QuoteHandle(ql.SimpleQuote(0.0055)))
swaption.setPricingEngine(bachelierEngine)
swaption.NPV()
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