Explanation:
The Black-Karasinski model, an interest rate model, has the characteristic that it allows time-dependent volatility, mean reversion, and short rate’s central tendency. This means that a user can use or remove as much time dependence as desired.
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Q.1679 A lognormal model with mean reversion is called the Black-Karasinski model. This model allows the volatility, mean reversion and short rate’s central tendency to depend on time. These features make this model arbitrage-free. This model shows that the natural logarithm of the short rate is normally distributed. What does this model allow the user to do which is not allowed in other models?
A
A user can use or remove as much time dependence as desired.
B
A user can change the distributions as desired in any situation.
C
A user can change the price of the securities under consideration when needed.
D
A user does not have any extra privilege under this model.