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

Pier Giuseppe Giribone (), Simone Ligato () and Martina Mulas ()
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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

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 01, 1-42

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.

Keywords: Interest rate cap valuation; interest rate floor valuation; swaption valuation; log-normal pricing model; normal pricing model; log-normal greeks estimation; normal greeks estimation; negative interest rates; hedging problem (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786317500153

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