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 "Derivative Insights & Innovations" monthly newsletter by Numerix:

* Required fields
video blog

The Graph Framework Advantage

press release - Jan 17, 2018

Numerix Oneview Insurance Named Actuarial Modelling Product of the Year in the Risk.net Market...

written blog

Transformative Power of Artificial Intelligence

in the news - Jan 9, 2018

Chartis RiskTech 100 2018 | Winners' Review: Numerix

newsletter issue - Jan 11, 2018

Derivative Insights & Innovations - January 2018 Issue

in the news - Dec 21, 2017

CEO Today USA Awards 2017

in the news - Nov 28, 2017

CEO Today | Committed to Thinking outside the Box

written blog

The Dependency Graph Advantage

in the news - Nov 28, 2017

GARP | Graph Technology: A Poweful Tool for Achieving Data Insight

news - article pdf - Dec 14, 2017

Buy-Side Technology Awards 2017 | Best Buy-Side Risk/Portfolio Analytics Product

press release - Dec 4, 2017

Best Analytics Platform for Structured Products Technology in Europe

conference presentation

Update on SIMM and Margining