Question #4

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: Q4-5 First in Group
Shared Context
- Based on Jensen's Statement 2, which model is least appropriate? A) The Vasicek model. B) The Cox-Ingersoll-Ross (CIR) model. C) The Ho-Lee model.
Question
Based on Jensen's Statement 3, which model is most appropriate?
Answer Choices:
A. The Cox-Ingersoll-Ross (CIR) model
B. The Kalotay-Williams-Fabozzi (KWF) model
C. The Vasicek model
Explanation
The CIR model assumes that interest rate volatility varies with . The Vasicek, the KWF, and the Ho-Lee models all assume a constant interest rate volatility.
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