Question #5

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
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
Regarding Jensen's observations:
Answer Choices:
A. both observations are incorrect
B. only Observation 2 is correct
C. only Observation 1 is correct
Explanation
Gauss+ is a multifactor model that incorporates short-, medium-, and long-term rates where the long-term rate is designed to be mean reverting and depends on macroeconomic variables. Medium-term rates revert to the long-term rate, while the short-term rate is devoid of a random component—consistent with the role of the central bank controlling short-term rates.
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