The Effects of Negative Nominal Rates on the Pricing of American Calls: Some Theoretical and Numerical Insights - Modern Economy

ME > Vol.8 No.7, July 2017

The Effects of Negative Nominal Rates on the Pricing of American Calls: Some Theoretical and Numerical Insights ()

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DOI: 10.4236/me.2017.87061 2,304 Downloads 4,029 Views Citations

Author(s)

Alessia Cafferata¹, Pier Giuseppe Giribone², Marina Resta¹

Affiliation(s)

¹DIEC, University of Genova, Genova, Italy.
²Banca Carige, Genova, Italy.

ABSTRACT

The article investigates the effects played on options pricing by negative risk-free rates when the underlying is an equity with null dividends. In such anomalous conditions, in fact, the fair value at early exercise of the American Call would not match the value of the European Call with the same financial features. We originally motivate this assumption with theoretical arguments. We then move to an empirical investigation where we put at work some quasi-closed formulas for pricing an American option and the stochastic trinomial trees algorithm. We then draw the conclusion that from a numerical viewpoint, the bias between the fair value of the American Call and the value of the corresponding. European Call is mainly due to approximation errors, which can be mitigated when Trinomial Stochastic Trees are used.

KEYWORDS

American Options, Quasi-Closed Formulas, Negative Interest Rates, Stochastic Trinomial Trees

Share and Cite:

Cafferata, A. , Giribone, P. and Resta, M. (2017) The Effects of Negative Nominal Rates on the Pricing of American Calls: Some Theoretical and Numerical Insights. Modern Economy, 8, 878-887. doi: 10.4236/me.2017.87061.

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