Fixed income - sample v2 from the CFAI question, overall, income

svgleeson

Completed the Level 3 Version 2 from the CFA Institute / TestTrac site (the first $40 one)
I think the second item set on fixed income is hogwash. I don’t want to spoil the party for others, but most of those fixed income answers seemed extremely questionable at BEST.
Curious if anyone else feels same way. Got 70 overall, which makes me feel semi-OK, as long as they don’t pull too much of this BS.
the other question that was a bit sketchy was - just before call option expiration the stock is $1 below the strike price… so is the delta just under 50 since it’s just below the strike, or is it 0 since it’s out of the money and just before expiry ? I guess it depends on the definition of ‘just.’

sharksfan

yeah, the hedging was messed up - what would the right ratio be to hedge a callable bond with futures, if not the effective duration? of course if rates move, the hedge ratio will move due to the call option. same with delta hedging, any instrument with different convexity vs. future.
what was that about spread risks should not be hedged? of course, you give up the risk, you give up the return, if markets are efficient. But you still might not want the risk at the spread it earns. And it still might be better to hedge the credit risk than to swap into a treasury. And then what is the point of all that reading about binary credit options ?
Then, what was that about callable/mortage security prices will be more sensitive than bullet prices? The call option reduces interest rate sensitivity - if rates go down the price won’t go up as much because of the call option. And on mortgages, getting some of the principal back every month in addition to interest reduces duration.