The effects of negative interest rates on the estimation of option sensitivities: The impact of switching from a log-normal to a normal model

Abstract

The estimation of partial derivatives of the price in respect to the main financial variables, called Greeks, is an essential task for a trader in order to understand the sensitivity of a derivative to the input of pricing model. The study of the level of reactivity of the mark to market is an essential task to manage properly the market risk of a portfolio. Due to the negative interest rates in Euro Area, the pricing model of interest-rates options (cap, floor and swaption) has been changed from a log-normal to a normal framework. The aim of this paper is to investigate the effects of this model change on the calculation of option sensitivities.