Events

Prof. Philip Dybvig
Boatmen’s Bancshares Professor of Banking and Finance and Economic Sciences Laureate
Olin School of Business
Washington University in Saint Louis

Option pricing usually assumes non-negative interest rates to avoid arbitrage in a frictionless world. However, frictions and negative rates do exist. When interest rates can go negative, distribution-free results on early-exercise of American puts and calls are almost reversed: if any discount rate from now is negative, it is strictly dominated to exercise an American put now, even with dividends. If rates can go negative, it may be strictly preferred to exercise an American call before maturity even absent dividends. We also provide pricing formulae and optimal exercise policy for perpetual calls in a Black-Scholes setting allowing negative rates.