Financial Risk Manager Part 2
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Q-79. A risk manager is pricing a 10-year Treasuries using a successfully tested pricing model. Current interest rate volatility is high and the risk manager is concerned about the effect this may have on short-term rates when pricing the option. Which of the following actions would best address the potential for negative short-term interest rates to arise in the model?
A
The risk manager uses a normal distribution of interest rates.
B
When short-term rates are negative, the risk manager adjusts the risk-neutral probabilities.
C
When short-term rates are negative, the risk manager increases the volatility.
D
When short-term rates are negative, the risk manager sets the rate to zero.