- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 27. The Arbitrage-Free Valuation Framework
- Subject 6. Term Structure Models
CFA Practice Question
In the CIR model, dr = a(b-r)dt + σ r1/2dz, the long-term interest rate is:
B. b
C. r
A. a
B. b
C. r
Correct Answer: B
The drift factor, a(b-r)dt, is exactly the same as in the Vasicek model. It ensures mean reversion of the interest rate towards the long run value b, with speed of adjustment governed by the strictly positive parameter a.
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