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The effects of negative interest rates on the estimation of option sensitivities: The impact of switching from a log-normal to a normal model

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  • Pier Giuseppe Giribone

    (CARIGE Bank Group, Genoa (Italy), 15 Cassa di Risparmio, 16123 Genoa, Italy)

  • Simone Ligato

    (CARIGE Bank Group, Genoa (Italy), 15 Cassa di Risparmio, 16123 Genoa, Italy)

  • Martina Mulas

    (KPMG Advisory SPA, 27 Via Vittor Pisani, 20124 Milan, Italy)

Abstract

The estimation of partial derivatives of the price in respect to the main financial variables, called Greeks, is an essential task for a trader in order to understand the sensitivity of a derivative to the input of pricing model. The study of the level of reactivity of the mark to market is an essential task to manage properly the market risk of a portfolio. Due to the negative interest rates in Euro Area, the pricing model of interest-rates options (cap, floor and swaption) has been changed from a log-normal to a normal framework. The aim of this paper is to investigate the effects of this model change on the calculation of option sensitivities.

Suggested Citation

  • Pier Giuseppe Giribone & Simone Ligato & Martina Mulas, 2017. "The effects of negative interest rates on the estimation of option sensitivities: The impact of switching from a log-normal to a normal model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-42, March.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:01:n:s2424786317500153
    DOI: 10.1142/S2424786317500153
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    References listed on IDEAS

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Riccardo Bramante & Gimmi Dallago & Silvia Facchinetti, 2022. "Black’s model in a negative interest rate environment, with application to OTC derivatives," Computational Management Science, Springer, vol. 19(1), pages 25-39, January.

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