问一道题：NO.PZ2016070201000071

问题如下：

Regarding the validity of time-dependent drift models, which of the following statements is(are) correct?

i. Time-dependent drift models are flexible since volatility from period to period can change. However, volatility must be an increasing function of short-term rate volatilities.

ii. Time-dependent volatility functions are useful for pricing interest rate caps and floors.

选项：

I only.

II only.

Both I and II.

Neither I nor II.

解释：

Time-dependent volatility models are very flexible and can incorporate increasing, decreasing, and constant short-term rate volatilities between periods. This flexibility is useful for valuing interest rate caps and floors because there is a potential payout each period, so the flexibility of changing interest rates is more appropriate than applying a constant volatility model.