Negative US interest rates: FT says Bloomberg telling terminal users to consider Bachelier options model instead of Black-Scholes

From the FT: Bloomberg recommended that users switch to a new model “as a preventive measure” to ensure that pricing functions on interest rate options or similar derivatives continue to work in the event of negative rates. It is also making similar changes to its foreign exchange and commodities pricing models.

From Reuters in April 2020:

“We currently use Bachelier to settle Brent Calendar Spread Options and other options products where the underlier can trade at negative prices,” a spokeswoman for the ICE said in a statement.

“If Brent prices become negative or we determine that the market wants to trade negative strikes for other oil contracts such as ICE Brent Options, we will look to expand the use of the Bachelier model as necessary.”

 

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