Market Insider – “Bloomberg is reportedly telling some terminal users to prepare for negative US rates so there aren’t any technical glitches if it happens:
- Data provider Bloomberg warned some users of its terminals on Monday that they should prepare for negative interest rates in the near future, the Financial Times reported.
- The note was sent to warn users to prepare any computer models used to calculate interest rate volatility for the possibility that the Federal Reserve may take interest rates below zero.
- Interest rate volatility forms part of the equation when calculating the price of options, a form of derivative that allows investors to buy assets at set prices in future.
- Most markets use a pricing model created by academics Fischer Black and Myron Scholes, but this formula breaks down if the cash or spot price of assets plunge below zero.
- Bloomberg, therefore, is urging customers to use a model composed by Louis Bachelier, which works even if prices turn negative…. ” [h/t Pete Weiss]