I know that most of you were born after Y2K, but for those old enough to remember… Prior to 1/1/2000 there were a whole bunch of people who thought that computers were going to fall apart and money would be lost all over the world due to some computer glitch. I thought that was pretty stupid. Now we have interest rates streaming toward 0 and below. I’ve written lots of programs about interest rates. I don’t think I’ve ever included non-positive interest rates in my debugging tests. I included lots of Y2K tests starting in '98 or so and the computer language largely took care of it. Computer languages don’t do anything to help with non-positive interest rates. Anybody have any thoughts about playing global operational destruction due to negative interest rates?
JoeyDVivre Wrote: ------------------------------------------------------- > I know that most of you were born after Y2K, but > for those old enough to remember… > > Prior to 1/1/2000 there were a whole bunch of > people who thought that computers were going to > fall apart and money would be lost all over the > world due to some computer glitch. I thought that > was pretty stupid. Now we have interest rates > streaming toward 0 and below. I’ve written lots > of programs about interest rates. I don’t think > I’ve ever included non-positive interest rates in > my debugging tests. I included lots of Y2K tests > starting in '98 or so and the computer language > largely took care of it. Computer languages don’t > do anything to help with non-positive interest > rates. > > Anybody have any thoughts about playing global > operational destruction due to negative interest > rates? How likely is this scenario?
You tell me. I just thought about it on my way in this AM.
Hmmm… interesting thought. Somehow I don’t think the world will blow up, but there may be a few glitches that will lead to temporary arbitrage opportunities until some program traders figure out that their SW needs debugging. I don’t have much insight into how to identify them, though…
Didn’t this happen in Japan - what happened to them?
bchadwick Wrote: ------------------------------------------------------- > Hmmm… interesting thought. > > Somehow I don’t think the world will blow up, but > there may be a few glitches that will lead to > temporary arbitrage opportunities until some > program traders figure out that their SW needs > debugging. > > I don’t have much insight into how to identify > them, though… Well, any valuation mechanism that has RFR interest rates in the denominator is likely to be affected. So I guess that may mean that there might be some interesting effects in currency arbitrage.
I dont think we have to worry about this because according to some religious guy in Utah, Russia will nuke US by Christmas.
There were some good moments in the Japanese interest rate nightmare like when Euroyen futures were trading above par. The Japanese finance minister raised interest rates unilaterally and for no more cogent reason than “we need interest rates to be above 0 to return normalcy to capital markets” or similar. The big difference, I think, is that Japan was pretty isolated in their wildly low interest rates and it was because Japanese cultural issues combined with the gigantic bust of real estate and equity valuations to turn them into a nation of money hoarders. That’s not the situation we’re in now.
Sorry for my ignorance, but I’m having a hard time understanding this whole concept of the Fed’s interest rate policy. I thought that when the Fed wants to reduce IRs they have to buy treasuries in the open market which pours cash into the market, thus making it easier for banks to find cash to loan to each other to make their overnight obligations. Does this mean that the Fed is currently buying up treasuries in the open market? It seems to me that they need to sell a boat load of debt to raise capital to fund all of the programs we’re running e.g. TARP, our deficit, our debt, etc.
bchadwick Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Hmmm… interesting thought. > > > > Somehow I don’t think the world will blow up, > but > > there may be a few glitches that will lead to > > temporary arbitrage opportunities until some > > program traders figure out that their SW needs > > debugging. > > > > I don’t have much insight into how to identify > > them, though… > > > Well, any valuation mechanism that has RFR > interest rates in the denominator is likely to be > affected. So I guess that may mean that there > might be some interesting effects in currency > arbitrage. Yeah…those were the programs I was thinking about. But I’m left with stupid ideas like vol of FX vol trades which just don’t work for me.
Excel’s MDuration won’t take negative yield as input.
I don’t think there’s an issue. Most of the time you multiply by the rate. The few times you divide you add a 1 to the rate…you can go back to sleep now.
ceo1975 Wrote: ------------------------------------------------------- > I don’t think there’s an issue. Most of the time > you multiply by the rate. The few times you > divide you add a 1 to the rate…you can go back > to sleep now. That’s because you haven’t been around long enough. What do you think of short rate futures trading above par? If your computer program spit out a money management stop on a ED contract at 101 what would you do? Would you buy or sell options on a ED 101 contract? How about an FX arbitrage program that arbs available bonds except the implied repo rate in the FX contract include a negative yield for one currency? How about disruptions in the repo market? If repo rates were negative, you could theoretically enter into a repo contract to borrow money at negative interest rates, never show up with a bond, but bill the bond dealer for the negative interest he owes you. And I’ll bet I could keep typing that way until 3PM. So perhaps I don’t need to go back to sleep, maybe you need to wake up.
TJR, the Treasury dept sells lots of bonds, while the Fed buys them in addition to buying other junk…that’s how they maintain the Fed funds rate.
Dreary Wrote: ------------------------------------------------------- > TJR, the Treasury dept sells lots of bonds, while > the Fed buys them in addition to buying other > junk…that’s how they maintain the Fed funds > rate. Actually, that’s not really so. The Fed maintains the Fed funds rate by providing funding in the repo market so open market operations don’t affect bond prices directly.
JDV do you there is a potential impact on option valuation
Yeah, but I don’t have a clear picture in my head about it yet.
> open market operations don’t affect bond prices directly Joey, I think you need to rethink that.
JDV, Could you please rephrase your reply in a formula? The repo rate and interest parity formulas as I remmember them have the (1+/- r ) in them. Black-Sholes uses the exp function which also can handle 0s and negatives. I have not worked programming these in over 10yrs so I’m might not recall exactly what actually goes into the formulas.
Dreary Wrote: ------------------------------------------------------- > > open market operations don’t affect bond prices > directly > > Joey, I think you need to rethink that. Uh…No, I don’t think so.