Negative rates: Dealers struggle to price 0% floors
Central banks are holding down interest rates in an attempt to spur growth, and some parts of the fixed-income markets have entered the weird terrain of negative rates. This is sparking a modelling arms race among dealers, as they seek to build or overhaul models to cope with zero- and negative-strike options. Laurie Carver reports
A London-based rates strategist at one US bank is recalling an episode from her time at London’s Imperial College, where she took a master’s course in finance five years ago: the professor had just casually mentioned that, of course, the interest rate is necessarily a positive variable, and one student asked why. The rest of the class laughed at what was seen as a stupid question.
No-one is laughing now. Negative rates are often seen in short-term German government bonds, other interest rate
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