FRM Part II · FRM Exam Part II · The Vasicek and Gauss+ Models
A risk manager is comparing a one-factor Vasicek model with a Gauss+ model for hedging a portfolio of swaps across the curve. Which statement best describes the main advantage of the Gauss+ specification?
The Gauss+ model's main advantage is that several Gaussian factors let the curve move in non-parallel ways, such as slope and curvature changes, while the affine Gaussian structure still gives closed-form bond prices. It does not prevent negative rates and keeps mean reversion.
- AIt captures non-parallel curve movements through several Gaussian factors, while still giving closed-form bond pricesCorrect
- BIt removes mean reversion so that rates can grow without bound
- CIt guarantees that interest rates can never become negative
- DIt requires numerical simulation because no closed-form bond prices exist
Explanation
Gauss+ uses multiple Gaussian factors (typically a few) to produce level, slope and curvature type moves, and its affine Gaussian structure retains analytic bond prices. It does not prevent negative rates, since Gaussian rates can be negative, and it retains mean reversion.
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