MBS mortgage, positive, following, long

adehbone

the following is from Schweser answer key for volume 2 exam 1 PM question 17.5 -

"MBS, on the other hand, include call options which increase in value with increased interest rate volatility. As long as rates do not fall enough to stimulate refinancing, a small drop in Treasury rates combined with increased volatility will provide positive outcomes for holders of MBS."


i was under the impression that if we own an MBS, the underlying mortgage owners own a call option AGAINST US, not that we own a call option. so i would have thought that increased vol, which increases the option value, would DECREASE the value of the MBS, not increase it.

Help?
Thanks.



Edited 1 time(s). Last edit at Tuesday, June 1, 2010 at 04:36PM by dpcfa.