- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 33. The Arbitrage-Free Valuation Framework
- Subject 2. Interest Rate Trees and Arbitrage-Free Valuation

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**CFA Practice Question**

In the binomial interest rate tree, if i

_{1, LL}is 1.5%, and the assumed volatility of the one year rate is 15%, i_{1, HH}is:A. 2.025%

B. 2.446%

C. 2.733%

**Explanation:**i

_{1, HH}= i

_{1, HL}e

^{2σ}

i

_{1, HL}= i

_{1, LL}e

^{2σ}

i

_{1, HH}= i

_{1, LL}e

^{4σ}

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**User Contributed Comments**
1

User |
Comment |
---|---|

rleewilson |
0.015*e^(4*0.15) = 2.733 |