Explanation:
Using the formula for simple short-term rates, dr = σdw.
In this case, σ = and dw = 0.18
Thus,
dr = 0.21`24% is the change in the short-term rate; 7.3924% is the short-term rate after 3 months (7.18 + 0.2124).
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Q.1651 An FRM candidate is analyzing the movement in short-term interest rates assuming the rates are normally distributed and there's no drift. Suppose the current short-term interest rate is 7.18%, in a time interval of 3 months per year (or 3/12 per year), with a volatility of 118 basis points per year. After a period of three months, the random variable dw has a value of 0.18. What are the change in the short-term interest rate and the short-term rate after 3 months?
A
0.2124% is the change in the short-term rate; 7.3924% is the short-term rate after 3 months.
B
7.3924% is the change in the short-term rate; 0.2124% is the short-term rate after 3 months.
C
1.2924 % is the change in the short-term rate; 8.4724% is the short-term rate after 3 months.
D
8.4724% is the change in the short-term rate; 1.2924 % is the short-term rate after 3 months.