## cox, ingersoll, ross model

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### cox, ingersoll, ross model

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:
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.

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