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Option Pricing, Zero Lower Bound, and COVID-19

Author

Listed:
  • Giacomo Morelli

    (Department of Statistical Sciences, Sapienza University of Rome, 00185 Rome, Italy)

  • Lea Petrella

    (MEMOTEF Department, Sapienza University of Rome, 00161 Rome, Italy)

Abstract

This paper provides a quantitative assessment of equity options priced at the Zero Lower Bound, i.e., when interest rates are set essentially to zero. We obtain closed form formulas for American options when the Zero Lower Bound policy holds. We perform numerical implementation of American put options written on the stock Federal National Mortgage Association (FNMA) and of related bounds for the optimal exercise. The results show similarities with the corresponding European options priced at the Zero Lower Bound during the COVID-19 crisis.

Suggested Citation

  • Giacomo Morelli & Lea Petrella, 2021. "Option Pricing, Zero Lower Bound, and COVID-19," Risks, MDPI, vol. 9(9), pages 1-13, September.
    • Handle: RePEc:gam:jrisks:v:9:y:2021:i:9:p:167-:d:634045
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    References listed on IDEAS

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    Cited by:

    1. Jitsawatpaiboon, Kanokrak & Ruan, Xinfeng, 2023. "The COVID-19 risk in the cross-section of equity options," Finance Research Letters, Elsevier, vol. 53(C).

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