In this Cutting Edge research article published in the September 2015 Issue of Risk Magazine, Alexandre Antonov, Michael Konikov, and Michael Spector present a natural generalization of the SABR model to negative rates—which is very important in the current low-interest-rate environment.

The paper derives an exact formula for the option price in the zero-correlation case and an efficient approximation for general correlation. The simplicity of the approximation permits a straightforward implementation. Moreover, the main formulae from the “absorbing” (standard) SABR approximation can be directly reused.

In this paper, the authors study different Monte Carlo schemes and come up with an efficient one. Finally, they have numerically checked the approximation accuracy for option pricing in this study.

This recent development of the free boundary SABR is a natural, convenient and elegant extension of the classical SABR. It has the same number of parameters as the classical SABR (no shift) and is equipped with an efficient and accurate analytical approximation, crucial for fast calibration.

Authors: Alexandre Antonov, Michael Konikov, and Michael Spector

Download Numerix Research Paper

Complete the form below to download this complimentary research paper.

Select Form: 

Form #5: Research

Keep me informed of future research from Numerix:

Sign me up to receive "Thinking Derivatively" monthly newsletter by Numerix:

* Required fields
quantitative research

Risk Magazine Cutting Edge Article | MVA Future IM for Client Trades and Dynamic Hedges

newsletter issue - Sep 10, 2019

Thinking Derivatively - September 2019 Issue

content collection

NEXT 365

white paper

White paper | The Transformative Impacts of the XVA State of Play

news - article pdf - Aug 20, 2019

Americas Derivatives Awards 2019 | Data and Analytics Vendor of the Year

live webinar

Webinar | How to Prepare for the Next Phases of Initial Margin Requirements

newsletter issue - Aug 12, 2019

Thinking Derivatively - August 2019 Issue

info graphic

Infographic | The Top 10 Checklist for Choosing the Right Managed Services Partner

news - article pdf - Jul 31, 2019

Waters Rankings 2019 | Best Credit Risk Solution Provider

conference

Sibos 2019

conference

Asia Risk Congress 2019

video blog

Managed Services