If on test day there is a question that states why does a 2 bond hedge work for an MBS..do you think the below answer would be sufficient/give me full points?
- In non-callable bonds a single key rate change causes most of the change in price.
- In callable bonds with not bullet at end, they are vulnerable to change in several key rates.
- As majority of change in price is due to yield curve shifts and twists, a 2 bond hedge from two maturity sectors of the yield curve would works best. |