In the cubic splines technique, which of the following is a benefit of adding more knot points to the algorithm?
A) It enhances the smoothness of the forward curve obtained from the fitted function.
B) It makes implementation easier as the number of parameters increases.
C) It increases flexibility in being able to fit a greater variety of shapes for the discount function.
D) It enables fitting the curve to more bonds and allows incorporating illiquid bonds as well.

Question

Quizplus · Accepted Answer

Adding more knot points in the cubic spline technique increases flexibility in being able to fit a greater variety of shapes for the discount function. This allows for a more customized fit to the specific data set and can improve the accuracy of the resulting curve. However, adding more knot points also increases the complexity of the model, so a balance between accuracy and simplicity must be struck.

In the Cubic Splines Technique, Which of the Following Is