series of quiz- mbs buying, investment, mortgage, principal, potential

LBriscoe

1. when should a portfolio manager manage the vol risk by buying options, when should he hedge dynamically?
2. mbs are market-directional investment that should be avoided when one expect interest rates to __________.
3. true or false: when managed properly, mortage securities are not market-directional investments.
4. five principal risks of mortgage securities:
5. After hedgin the IR risk of a mortgage security, the portfolio manager has the potential to earn the treasury bill rates plus _____.
6. two important factors in explaning changes in yield curve are changes in the _____ and _______.
7. true or false: the addition to a two-bond hedge of an appropriate number of interest rate options enables a portfolio manager to offset SOME or ALL of the negative convexity of a cuspy-coupon mortgage security.
8. how to calculation the duration of an option.

IAmNeil

1. when future volatility prediction is high use options
2. fall
3. true
4. volatility, interest rate, model, prepayment, spread
5. spread (it is actually risk free rate plus potential on spread)
6. ??
7. true
8. delta*duration*price_underlying/price_option

answers pls happyking?

Windjammer

1. hedge dynamically when the implied vol in the option price is high and the portfolio manager believes that future realized vol will be lower than the implied vol.

the opposite is true for option hedge.

2. decline
3. true
4. interest risk, prepayment, vol, model, spread
5. OAS
6. Level and twist
7. true
8. delta*duration of underlying*price_underlying/price_option

canadiananalyst

1. Hedge dynamically if implied volatility is high, but expected to drop. If low, but expected to rise hedge with options.
2. An unhedged MBS should be avoided in a falling interest rate environment due to negative convexity.
3. A properly hedged MBS will NOT be market directional, though it is often falsely believed to be.
4.Spread (don't hedge), Interest, Prepayment, Volatility, Model
5. OAS
6. Shape and duration?
7. True
8. Brain fart

nannan66

1. when future volatility prediction is high (volatility prediction is low : option)
6. Parallel shift / twist
7. Whay is the cuspy-coupon mortgage security?

susana

a cyspy-coupon mortage security is a mortgage security for which changes in IR have large effects on pre-payments and prices.

wake2000

It is the sweet spot along the curve ...I believe it is actually the point where it switches from positive convexity to negative convexity. Usually denoted by r*. Due to the large effects the changes have, it needs more than just the standard 2/10 to hedge, thus you use options or hedge dynamically. You would hedge dynamically if the implied volatility is high, but think actual volatility will be lower (because options will be expensive due to BS model); if implied volatily is low and you think actual will be higher you'd use options.

PalacioHill

i recall that a cuspy won't work well for two bond hedge, u need an additional purchase of puts and calls... so i dont think it can hedge ALL of the neg convexity...

mcmc

This is my first time of hearing duration of option. I know options have delta...

mar350

Duration of option = Option delta*duration of underlying*(price of underlying/price of option)

NO EXCUSES