Answer: The model presumes that the basis-point volatility of the short rate will be proportional to the square root of the rate.

## Explanation The Cox-Ingersoll-Ross (CIR) model is a single-factor short-rate model where the basis-point volatility (volatility of interest rate changes) is proportional to the square root of the short rate. This is a key characteristic that distinguishes CIR from other models like the Vasicek model. **Key features of the CIR model:** - **Mean-reverting**: Interest rates revert to a long-term mean level - **Square root process**: Volatility = σ√r (where r is the short rate) - **Non-negative rates**: The square root ensures interest rates cannot become negative **Why other options are incorrect:** - **Option A**: This describes a model with linearly increasing volatility, not CIR - **Option B**: This describes exponential decay of volatility, characteristic of some other models - **Option C**: This describes volatility proportional to the rate itself (log-normal models), not the square root The CIR model's volatility structure (σ√r) makes it particularly useful for modeling interest rates while ensuring they remain non-negative, which is an important practical consideration in financial modeling.

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