- 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
CFA Practice Question
In the binomial interest rate tree, if i1, H is 4%, and the assumed volatility of the one year rate is 10%, the implied forward rate is:
A. 3.24%
B. 3.48%
C. 3.64%
Explanation: i1, L = i1, H/e2σ = 3.27%. The implied forward rate is the mean of the adjacent two rates.(4% + 3.27%)/2 = 3.64%.
User Contributed Comments 0
You need to log in first to add your comment.