what does market dirctional mean? like, mortgage, contents, investment

Viceroy

Prepayment risk is the cause of the negative convexity, which means the mortgage security loses more from a given increase in yield than it gains from a corresponding decrease in yield.

This is why an unhedged mortgage security is called a market directional investment.
==============================================================



In the above contents in Schweser explaning fixed income, I would like to know what the market directional means.
As read the forum I saw the word and I realized I don't know the meaning.

when R increases : large loss in value
when R decreases : small gain in value
(in negative convexity)

I could understand the concept but how this is related with the word market directional?

IAmNeil

Market directional means that an investment is attractive only when it moves in a certain direction. From your example, it means when R decreases.

former

Just to clarify, MBS should be considered in a rising rate environment since duration tends to increase because of lower prepayments.

NO EXCUSES



Edited 1 time(s). Last edit at Wednesday, May 11, 2011 at 08:45AM by bpdulog.