Which of the Following Statements Is INCORRECT

question 21

Multiple Choice

Which of the following statements is INCORRECT?

• A) A caplet's delta measures how a small change in the underlying simple forward rate changes the caplet's value.
• B) A portfolio of caplets can be delta- and gamma-hedged.
• C) The hedging approach in the case of the HJM libor model is analogous to that of the Black-Scholes-Merton model.
• D) As the HJM libor model specifies an evolution for simple forward rates,rho hedging becomes an effective tool for managing interest rate risk in a portfolio consisting of caplets.
• E) A delta-hedge involves trading another interest rate-sensitive security in order to remove all the interest rate risk from a long caplet position.

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Definitions:

Generalization

The process of applying the knowledge gained from specific instances to broader situations or populations.

Unconditioned Stimulus

In classical conditioning, a stimulus that naturally and automatically triggers a reflexive response without prior learning.

Unconditioned Response

is an automatic, natural reaction to a stimulus that occurs without the need for prior learning or conditioning.

Conditioned Stimulus

A previously neutral stimulus that, after becoming associated with an unconditioned stimulus, eventually comes to trigger a conditioned response.