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
industry conference

Equity-Based Insurance Guarantees Conference 2018

quantitative research

Efficient Simm-MVA calculations for callable exotics

newsletter issue - Sep 5, 2018

Thinking Derivatively - September 2018 Issue

written blog

Real Time Demands and other Forces Spark Growth of Electronification: Experts Say

white paper

Adapting to Change in the Electronic Fixed Income and OTC Markets: Have We Reached an Inflection...

written blog

CEO Spotlight: Mazy Dar, OpenFin

news - article pdf - Aug 28, 2018

The Technology Headlines August 2018 | Numerix Featured on Cover of The Technology Headlines

news - article pdf - Aug 14, 2018

Finance Monthly CEO Awards 2018 | Numerix CEO Steve O'Hanlon Featured on Cover of Finance...

in the news - Aug 9, 2018

Legacy derivs trading tools “still important” – experts

industry conference

Conferencia sobre el Riesgo de Contraparte (CVA) en Mexico

newsletter issue - Aug 8, 2018

Thinking Derivatively - August 2018 Issue

written blog

When Trying to Transform Your Organization, Are These Five Principles Getting Lost?