Y2K vs 0 interest rates

ceo1975 Wrote: ------------------------------------------------------- > 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. This isn’t the issue. I’m sure that B-S will hold up fine. B-S is used in capital markets to translate strike/price into delta/vol terms and that’s about it. If you want a formula, check out the post I just replied to for jimjohn. Black-Karasinski (which jimjohn seems to be using for something) does not allow negative interest rates. One of the selling points of the model is that it doesn’t allow for negative interest rates. Suppose that jimjohn does whatever it is he is doing and walks away from the model and someone starts fitting B-K models unwittingly with negative interest rates. What happens?

I thought B-K models were for Burger King.

JoeyDVivre Wrote: ------------------------------------------------------- > 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. That’s interesting, why wouldn’t they affect bond prices? Wouldn’t the Fed’s buying and selling of treasuries affect demand and therefore the prices paid (the flip side of affecting yield)?

Because open market operations rarely involve buying and selling bonds. They involve providing or demanding funding in the repo market. That’s because the Fed doesn’t want to be a 900-lb gorilla in the bond market because, if they were, everyone would be front-running the Fed all over everywhere and there would be this massive govt funding of everyone smart enough to front-run obvious Fed moves meant to influence short-rates.

ok, Open market operations use repos (either temporary or permanent) and other tools to control the fed funds rate. The Fed cannot play this game without having securities to trade, which typically means U.S. treasuries. OMO’s affect the level of reserves available to banks, which pushes short term rates up or down to get as close as possible to the FFR. Short-term interest rates (including the FFR) end up affecting bond prices, just as interest rates always do. The Fed only works through big dealers, the primary dealers, and so it is not really involved in the bond market directly.

Thanks Joey, I did not know that.

Dreary Wrote: ------------------------------------------------------- > ok, Open market operations use repos (either > temporary or permanent) and other tools to control > the fed funds rate. The Fed cannot play this game > without having securities to trade, which > typically means U.S. treasuries. OMO’s affect the > level of reserves available to banks, which pushes > short term rates up or down to get as close as > possible to the FFR. Short-term interest rates > (including the FFR) end up affecting bond prices, > just as interest rates always do. The Fed only > works through big dealers, the primary dealers, > and so it is not really involved in the bond > market directly. Right. I said OMO do not affect bond prices DIRECTLY. Obviously, Fed policy affects bond prices in all kinds of interesting ways.