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Negative Rates: The Challenge and the Opportunity

Negative interest rates have recently become a critically important issue in finance, as they impact some of the most basic calculations and procedures used by the financial community. Two prominent examples are the quotation of option volatilities and volatility smile interpolation models, both of which we will explore further in this article.

 

Clearly, pricing methodologies must continue to adjust to this new negative rate phenomenon. This article discusses the challenges that negative rates pose to the financial community
and looks at how market practices are in fact evolving and becoming more innovative to address these challenges.