Question #46
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
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Question
Which of the following most accurately explains how the effective convexity is computed using the binomial model. In order to compute the effective convexity the:
Answer Choices:
A. binomial tree has to be shifted upward and downward by the same amount for all nodes
B. yield curve has to be shifted upward and downward in a parallel manner and the binomial tree recalculated each time
C. volatility has to be shifted upward and downward and the binomial tree recalculated each time. Explanation Apply parallel shifts to the yield curve and use these curves to compute new forward rates in the interest rate tree. The resulting bond values are then used to compute the effective convexity. (Module 27.5, LOS 27.i)
No explanation available for this question.