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.