- Data provider Bloomberg warned some users of its terminals on Monday that they should prepare for negative interest rates in the near future, the Financial Times reported.
- The note was sent to warn users to prepare any computer models used to calculate interest rate volatility for the possibility that the Federal Reserve may take interest rates below zero.
- Interest rate volatility forms part of the equation when calculating the price of options, a form of derivative that allows investors to buy assets at set prices in future.
- Most markets use a pricing model created by academics Fischer Black and Myron Scholes, but this formula breaks down if the cash or spot price of assets plunge below zero.
- Bloomberg, therefore, is urging customers to use a model composed by Louis Bachelier, which works even if prices turn negative.
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Bloomberg has told users of its terminals to prepare for US interest rates plunging below zero to prevent technical glitches seen during other spectacular price moves in recent months, the Financial Times reported Tuesday.
The FT said, citing a note sent out by Bloomberg on terminals Monday, the company urged its users to review their computer models used for determining interest rate volatility.
Interest rate volatility is a vital part of the equation when calculating the price of options, which allows holders to purchase or sell financial instrument at a specific point in time.
Business Insider operates a Bloomberg terminal, but could find no evidence of having received the note on Tuesday.
The company reportedly told users to switch to a new model as a precautionary measure. It is also said to be making equivalent changes to its forex and commodities pricing models.
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Fed chairman Jerome Powell so far has turned a blind eye to negative rates,
Instead, the Fed has kept its benchmark policy rate at close to zero since March — and indicated that’s where rates will stay until the until the end of 2022 — while significantly expanding its asset purchase program.
But analysts have noted that what the Fed does will ultimately depend on the type of recovery the US has from its current economic crisis. If the economy springs back quickly, negative rates are unlikely, but if there is longer turmoil, they become more possible.
Bloomberg reportedly said in a statement that it “continuously stress tests its systems against all kinds of scenarios, and as part of these efforts we are preparing our systems for the possibility of negative yields on US fixed income instruments.”
“We have prior experience of such preparations as negative rates have…