Financial Risk Manager Part 2
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A Chief Risk Officer (CRO) of a hedge fund has tasked the risk department with developing a term-structure model to effectively adjust interest rates for the hedge fund's options pricing strategy. In pursuit of this objective, the risk department is evaluating different interest rate models characterized by their ability to accommodate both time-varying drift and time-varying volatility functions. Which model accurately encapsulates these characteristics?
A
In the Ho-Lee model, the drift of the interest rate process is presumed to be constant.
B
In the Ho-Lee model, when the short-term rate is above its long-run equilibrium value, the drift is presumed to be negative.
C
In the Cox-Ingersoll-Ross model, the basis-point volatility of the short-term rate is presumed to be proportional to the square root of the rate, and short-term rates cannot be negative.
D
In the Cox-Ingersoll-Ross model, the volatility of the short-term rate is presumed to decline exponentially to a constant long-run level.