Financial Risk Manager Part 2
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The Chief Risk Officer (CRO) of a hedge fund has tasked the risk department with developing a term-structure model that can effectively adjust interest rates for the fund's options pricing strategy. The risk department is evaluating different interest rate models, specifically those that feature both time-varying drift and time-varying volatility. Which model accurately represents 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.