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

Corentin Rordorf

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