if you hedge the spread risk - you can go only one way. Either the spread widens - you hedge for that, if the spread narrows - you lose.
Spread Narrows - your portfolio gains - but you lose on your hedging contract.
So Spread Risk is not hedged.
You buy MBS when low value - i.e. when Spreads are wide.
Sell MBS when HIGH value - i.e. when Spreads are NARROW.
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Invest in MBS when initial OAS is HIGH - that is Spreads are WIDE - and it is low priced.
I think the measure of Spread that they use in the MBS chapter is OAS … since there are not option free bonds. |