
Ultimate access to all questions.
As part of enhancing the fund’s options pricing strategy, the Chief Risk Officer (CRO) of a hedge fund has instructed the risk team to develop a term-structure model that can accurately adjust interest rates. The risk team is evaluating different interest rate models, specifically those that incorporate either time-dependent drift or time-dependent volatility functions. Identify which of the following options correctly represents the type of model being described.
A
In the Ho-Lee model, the drift of the interest rate process is assumed to be constant.
B
In the Ho-Lee model, when the short-term rate is above its long-run equilibrium value, the drift is assumed to be negative.
C
In the Cox-Ingersoll-Ross model, the basis-point volatility of the short-term rate is assumed 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 assumed to decline exponentially to a constant long-run level.