cox, ingersoll, ross model

madhuri1682
Good Student
Posts: 29
Joined: Thu Oct 04, 2012 2:09 am

cox, ingersoll, ross model

Postby madhuri1682 » Tue Nov 13, 2012 10:34 am

Steffy Williams is a fixed income portfolio manager which consists of option free government securities and corporate bonds. She predicts that short term interest rate will increase by 1% to 5.5% in next three months. But, she is not sure that if 5.5% is mean reverting level for interest rates or not. She used Cox, Ingersoll, Ross model know the mean reverting level of interest rate based on following data:
Speed of reversion measuring parameter = 0.14
Instantaneous volatility of short term interest rates=20%
Distributional parameter= 0.5
Normally distributed random variable= 0.2010
dt=0.35
Which of the following conclusion made by Steffy is correct:
Choose one answer.
a. The interest rate of 5.5% is not mean reversion level. The interest rate will further increase by 1% assuming everything else constant
b. The interest rate of 5.5% is the mean reversion level.
c. The interest rate of 5.5% is not mean reversion level at the present volatility. If volatility of short term interest rates increases to 22.3%, then only 5.5% would be mean reversion level keeping everything else constant
d. None of the above is correct

please explain the concept behind this.

Tags:

Return to “FRM Part I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.