Question #24
Reading: Reading 26 The Arbitrage-Free Valuation Framework
PDF File: Reading 26 The Arbitrage-Free Valuation Framework.pdf
Page: 11
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. Mean reversion of interest rates
B. Non-negative interest rates
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. Binomial trees do not force mean reversion of rates.