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Home My Path Stochastic Modeling M3: Calibrating CIR and BCC Models SM Practice Quiz M3

SM Practice Quiz M3 Assessment Mode

QUESTIONS
Question 1 What is the main difference between the Vasicek (1977) and CIR
1 2 3 4 5
(1985) interest rate models?
6 7 8 9 10

Vasicek (1977) includes a term so that the volatility of short- 11 12 13 14 15

rate is proportional to the short-rate level.
16 17 18 19 20

CIR (1985) includes two stochastic components (random

variables), while Vasicek (1977) includes only one.

CIR (1985) includes a term so that the volatility of short-rate is

proportional to the short-rate level.

Vasicek (1977) includes two stochastic components (random

variables), while CIR (1985) includes only one.

That's correct!

Question 2 The BCC (1997) model incorporates important stock price features
observed in the real world. Which ones?

Stochastic volatility and deterministic interest rates, plus a

jump diffusion

Stochastic volatility and interest rates

Stochastic volatility and interest rates, plus a jump diffusion

Deterministic volatility and stochastic interest rates, plus a

jump diffusion

Well done!

Question 3 There are several steps involved in the calibration of a BCC (1997)
model. Which one should we begin with?

Calibrating a stochastic volatility model

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Calibrating jump diffusion

Calibrating local volatility parameters

Calibrating a stochastic interest rate model

Correct!

Question 4 In the CIR (1985), the expression for the forward rate between times
t and T is what?

The CIR model does provide an expression for the ZCB price,
but not for the forward rate.

That's correct

Question 5 In the classic Vasicek (1977) model, what is the form of the Zero-
Coupon-Bond price function?

That's right!

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Question 6 What is the main addition of the BCC (1997) model with respect to
Bates (1996)?

Stochastic interest rates

Mean reverting process for volatility

Jump diffusion

Stochastic volatility

Correct!

Question 7 According to the BCC (1997) model, which of the following SDEs
corresponds to the modeling of interest rates?

Correct!

Question 8 The 4-month Euribor rate is currently 0.245%. What is the 4-month
capitalization factor? (Use 30/360 convention.)

1.00245

0.00245

0.0008167

1.0008167

Well done!
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Question 9 Which of the following expressions corresponds to the CIR (1985)

model SDE?

That's right!

Question 10 (Note: You may use Python to solve this question.) Use the Lewis
(2001) approach provided in the notebooks to price, under the BCC
(1997) model, a Put option with the following characteristics and
model parameters:

months

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Select the price closest to your answer. (Hint: You can use Put-Call
parity.)

11.77

1.43

1.025

12.80

Close, but not quite. Make sure you are taking into account
stochastic interest rates.

Question 11 Suppose we want to calibrate our model using an MSE error

function on relative price differences. Which of the following
expressions would you choose to optimize?

That's right!

Question 12 The capitalization factor for 4-month risk-free bonds is 1.0008167.

What is the equivalent annualized continuous rate? (Use 30/360
convention.)

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2.45%

0.245%

0.081%

Well done!

Question 13 Which of the following expressions corresponds to the Vasicek

(1977) model SDE?

That's correct!

Question 14 (Note: You may use Python to solve this question.) Use the Lewis
(2001) approach provided in the notebooks to price, under the BCC
(1997) model, a Call option with the following characteristics and
model parameters:

months

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Select the price closest to your answer. (Hint: You can use Put-Call
parity.)

17.44

14.12

16.45

11.77

Correct!

Question 15 In the first step of the BCC (1997) calibration process, how many
parameters are we calibrating?

That's not correct. Remember that the first step of the

calibration has to do with the CIR model.

Question 16 In the Lesson 2 notebook, we learned how to interpolate interest

rates. Which method did we use?

We did so by projecting forward rates into the future.

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Linear interpolation

Nelson-Siegel-Svensson

Cubic spline

That's correct!

Question 17 When we perform a Monte-Carlo simulation of the CIR and Vasicek

models under given parameters as shown in the slides and
notebook for Lesson 1, we get very different estimates of the
evolution of interest rates. Why is that?

CIR (1985) is not a proper model for modeling interest rates.

Vasicek (1977) is not a proper model for modeling interest

rates.

Since they are different models, it is just logical that they yield
very different results.

We need to properly calibrate the parameters for each model.

That's actually not entirely correct. Given the high similarity

between both of these models, we should expect a very
similar (yet not entirely identical) evolution of interest rates
under both models.

Question 18 Which sources of randomness (random variables) are present in a

BCC (1997) model?

Normal and Poisson

Normal and Lognormal

Normal

Poisson

That's right!

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Question 19 In the process of calibrating a BCC (1997) model, which of the

following steps will go last?

Calibration of the stochastic volatility component

Calibration of the jump diffusion component

Global calibration of the full model

Calibration of the stochastic interest rate component

Correct!

Question 20 The normalized ZCB with a maturity of 2.5 years has a price today
of 0.985. What is its implied yield ? (Use natural logs for the
calculation.)

1.2%

9.85%

0.6%

0.2%

That's incorrect. Make sure you are using natural logs for the
calculation (Ln).

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