In the Black-Derman-Toy (BDT)model,short rates have
A)Constant volatility for all maturities.
B)Volatility that changes by maturity of the short rate.
C)Volatility that varies by maturity and level of the short rate,i.e. ,state-dependent volatility.
D)Stochastic volatility.

Question

Quizplus · Accepted Answer

For each maturity the volatility is given,but it may be different by maturity.The volatility of a short rate does not depend on its level,nor is it stochastic.Interest rates are stochastic,of course,but not the volatility of rates.

In the Black-Derman-Toy (BDT)model,short Rates Have