In the context of valuing a 5-year callable option on a 5-year Treasury note using a well-validated pricing model, particularly under conditions of high current interest rate volatility, what is the most effective strategy for a financial analyst to manage the potential risk of encountering negative short-term interest rates?

Exam-Like

When short-term rates are negative, the financial analyst adjusts the risk-neutral probabilities.

12.5%

When short-term rates are negative, the financial analyst increases the volatility.

15.6%

When short-term rates are negative, the financial analyst sets the rate to zero.

56.3%

When short-term rates are negative, the financial analyst sets the mean-reverting parameter to 1.

15.6%

Financial Risk Manager Part 2