Fixed Income【Session10- Reading 26】 习题精选 security, mortgage, contract, 2012

burning0spear

Hedging a mortgage security with a short Treasury futures contract is most effective if:

A) it is trading above par.

B) it is trading at par.

C) it is trading below par.

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If the security is trading below par, then it is most likely to exhibit positive convexity, and this will make a hedge formed with a Treasury futures contract that has positive convexity more effective.

burning0spear

A mortgage security’s convexity is most likely to become negative if the market yield is:

A) increasing and the price moves below par.

B) declining and the price moves above par.

C) declining and the price moves below par.

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A declining market yield will cause the price to increase. This condition will make prepayment more likely, and make the convexity negative.

burning0spear

For a mortgage backed security trading at par, a large increase in market rates is most likely to make the security’s convexity:

A) become infinite.

B) go from positive to negative.

C) go from negative to positive.

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The best answer is go from negative to positive. As rates increase and the price declines, the prepayment option goes out of the money. We could also say the convexity, if already positive, can become more positive, but that was not one of the answers.

burning0spear

For a mortgage security trading at par and a hedge formed with a short position in a Treasury futures position that is designed to maintain a stable value, the hedge would still be effective if:

A) there is a 100 basis point decrease in yield.

B) there is a 100 basis point increase in yield.

C) there is a 75 basis point decrease in yield.

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A hedge that is designed to be effective for changes of +/-50 basis points for a mortgage security trading at par will likely be less effective for decreases greater than 50 basis points. This is because of negative convexity. Since the mortgage security is likely to exhibit positive convexity for prices below par, the hedge is more likely to be effective for the larger increase in yield.

burning0spear

A portfolio manager has used a Treasury bond futures contract to hedge a mortgage security, which is trading at par, against a decrease in value from a 50 basis point increase in yield. If the yield were to decrease 50 basis points, the most likely result is:

A) the net value of the position with the hedge will decline.

B) the net value of the position with the hedge will increase.

C) the net value of the position with the hedge will not change.

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The most likely result is that the position with the hedge will decline because of the mortgage security’s negative convexity. As the yield decreases, the prepayment option goes in the money and the value of the security does not go up by as much as the value of the short futures position goes down because the futures position has positive convexity.

burning0spear

A mortgage security is most likely to exhibit positive convexity if:

A) the price is below par.

B) the yield curve has a parallel downward shift.

C) the price is above par.

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If the price is below par, the market yield must be higher than the yield on the underlying mortgages, and the prepayment rate will be lower. This means the instrument is more likely to exhibit positive convexity.

burning0spear

A mortgage security with a face value had a price of 99 at the opening of the trading day. During the day, the yield declined by 80 basis points below its opening yield and then increased 80 basis points above its opening yield. The corresponding prices of the instrument were 99.5 and 98 respectively. From this we can say the security:

A) exhibited excess volatility.

B) exhibited positive convexity.

C) exhibited negative convexity.

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The fact that the price increase from the yield decline was less than the price decrease from the yield increase is indicative of negative convexity caused by a prepayment option.

burning0spear

The effects of recent technological and institutional innovations on the market for mortgage-backed securities has increased:

A) volatility risk.

B) model risk.

C) spread risk.

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The innovations have had a direct effect on the ability of models to predict prepayment rates.

burning0spear

All of the following are risks associated with mortgage securities EXCEPT:

A) volatility risk.

B) model risk.

C) beta risk.

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Beta is not generally a concept directly associated with mortgage securities. Model risk is important because the current value depends upon patterns of interest rates and prepayment rates. The changing spread can influence the asset’s value. Because of the embedded option, volatility risk is important too.

burning0spear

If a manager of mortgage backed securities is not hedging spread risk, the most likely reason is because hedging spread risk:

A) reduces profitable opportunities.

B) is impossible.

C) increases volatility risk.

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A manager can earn profits by buying mortgage backed securities when the spread widens and selling when the spread narrows.