r>-1

Water Cooler
#1

All, I am preparing for MFE (financial engineering). I could not thin of any other forum where i could seek help for clearing my doubts on financial products.

Dear experts, is my below understanding correct?

Is the r>-1 is coming from this statement

&&&1 + r&&&

if 1+r>0, then r>-1

Extract from Stochastic Calculus for Finance 1

We introduce also an interest rate 1n. One dollar invested in the money

market at time zero will yield 1 + r dollars at time one. Conversely, one dollar

borrowed from the money market at time zero will result in a debt of &&&1 + r&&&

at time one. In particular, the interest rate for borrowing is the same as the

interest rate for investing. It is almost always true that r >= 0, and this is

the case to keep in mind. However, the mathematics we develop requires only

that r > -1.

Kindly guide

#2

There is no doubt that if r+1 >0 than r > -1 ! :slightly_smiling_face:

#3

Is it just me, or is this question idiotic? If r is lower than -1, then you will invest and rather than receive any money back, you will be required to pay more money.

#4

GE did this for years.

#5