Question #22
Reading: Reading 26 The Arbitrage-Free Valuation Framework
PDF File: Reading 26 The Arbitrage-Free Valuation Framework.pdf
Page: 10
Status: Correct
Correct Answer: B
Question
Which of the following choices is least likely a property of a binomial interest rate tree?
Answer Choices:
A. Non-negative interest rates
B. Adjacent forward rates in a nodal period are one standard deviation apart
C. Higher volatility at higher rates
Explanation
A binomial interest rate tree has two desirable properties: non-negative interest rates and
higher volatility at higher rates. Additionally, adjacent forward rates in a nodal period are
two standard deviations apart.