Consider a One-Factor HJM Model Where the Initial Forward Curve $T$

question 13

Multiple Choice

Consider a one-factor HJM model where the initial forward curve is given as 6% for one year and 7% between one and two years. The evolution of continuously-compounded one-year forward rates beginning at time $T$ , is given by the following binomial process: $f ( t + 1 , T ) = f ( t , T ) + \alpha \pm 0.02$ , where the up and down movements are equiprobable. What is the $\alpha$ value for $f ( 1,1 )$ ?

• A) \(- 0.0001\)
• B) \(- 0.0002\)
• C) \(+ 0.0001\)
• D) \(+ 0.0002\)

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Definitions:

Aggregate Demand

The cumulative requests for goods and services in an economy, aimed at a fixed price level within a set timeline.

Long-Run Effect

The impact of economic policies or events that become apparent and have a sustained influence over an extended period.

Real GDP

The assessment of a nation's economic production, corrected for variations in price levels (either inflation or deflation), representing the real worth of all goods and services generated.

Aggregate Demand Curve

A graphical representation that shows the relationship between the overall price level in the economy and the total demand for goods and services at that price level.