Financial Risk Manager Part 2
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An analyst is studying term structure models that incorporate measures of volatility into the interest rate process. The analyst focuses on the Cox-Ingersoll-Ross (CIR) model and its treatment of volatility of the short-term interest rate. Which of the following statements is correct regarding the yield volatility and basis-point volatility in the CIR model?
A
Periods of extremely low short-term interest rates are accompanied by high basis-point volatility, which increases the possibility of negative interest rates in the CIR model.
B
In the CIR model, basis-point volatility is specified as a decreasing function of the mean reversion factor.
C
In the CIR model, yield volatility is specified as being constant while basis-point volatility is allowed to vary.
D
Basis-point volatility and yield volatility are used interchangeably to measure the same volatility in the CIR model.