Question #3

Reading: Reading 26 The Arbitrage-Free Valuation Framework

PDF File: Reading 26 The Arbitrage-Free Valuation Framework.pdf

Page: 2

Status: Incorrect

Correct Answer: A

Your Answer: C

Part of Context Group: Q3-5 First in Group
Shared Context
- Based on Jensen's Statement 1, which model is most appropriate? A) The Kalotay-Williams-Fabozzi (KWF) model. B) A Gauss+ multifactor model. C) The Ho-Lee model.
Question
Based on Jensen's Statement 2, which model is least appropriate?
Answer Choices:
A. The Vasicek model
B. The Cox-Ingersoll-Ross (CIR) model
C. The Ho-Lee model
Explanation
The CIR model and the Vasicek model are equilibrium models and assume that interest rates follow a mean-reverting process. The Ho-Lee and the Kalotay-Williams-Fabozzi (KWF) models are arbitrage-free models and do not require mean reversion in rates.
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