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.

ohai

bpdulog Wrote:
-------------------------------------------------------
> Duration of option = Option delta*duration of
> underlying*(price of underlying/price of option)


Personally, I would say that duration of an option is just rho which would not be exactly the same as this because the option is sensitive to interest rates even if the underlier isn't. Is this (cheesy) definition in one of your books?

Colum

absolutely

thommo77

JoeyDVivre Wrote:
-------------------------------------------------------
> bpdulog Wrote:
> --------------------------------------------------
> -----
> > Duration of option = Option delta*duration of
> > underlying*(price of underlying/price of
> option)
>
>
> Personally, I would say that duration of an option
> is just rho which would not be exactly the same as
> this because the option is sensitive to interest
> rates even if the underlier isn't. Is this
> (cheesy) definition in one of your books?

Yup!

NO EXCUSES

strikethree

jmac01 Wrote:
-------------------------------------------------------
> 2. mbs are market-directional investment that
> should be avoided when one expect interest rates
> to __________.
>
> So, everyone says fall.
>
> But, when yields fall, the price increases but
> then levels off/falls due to the negative
> convexity. When yields rise, the price falls (but
> not as much as a corporate bond). So, is it
> really correct to say that you would avoid MBS if
> you expect rates to decrease? doesnt seem like
> you would buy them if rates were increasing.


I think this statement would apply if you take a relative approach, say, in relation to straight corporate bonds. Because of the negative convexity from the prepay option in MBS's, you would rather be long option-free bonds if rates fall, all else being equal.

liangfeng

2. mbs are market-directional investment that should be avoided when one expect interest rates to __________.

So, everyone says fall.

But, when yields fall, the price increases but then levels off/falls due to the negative convexity. When yields rise, the price falls (but not as much as a corporate bond). So, is it really correct to say that you would avoid MBS if you expect rates to decrease? doesnt seem like you would buy them if rates were increasing.

Analti_Calte

jmac01 Wrote:
-------------------------------------------------------
> 2. mbs are market-directional investment that
> should be avoided when one expect interest rates
> to __________.
>
> So, everyone says fall.
>
> But, when yields fall, the price increases but
> then levels off/falls due to the negative
> convexity. When yields rise, the price falls (but
> not as much as a corporate bond). So, is it
> really correct to say that you would avoid MBS if
> you expect rates to decrease? doesnt seem like
> you would buy them if rates were increasing.

If CFAI tells me my name is "Goat" then my name is indeed, Goat.

NO EXCUSES

aidebaobao

pimpineasy Wrote:
-------------------------------------------------------
> bulldog i like it like this
>
> (Duration of option*price of option)/(duration of
> underlying*price of underlying)
>
> = Option delta


Thanks!

mar350

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

NO EXCUSES

Roflnadal

bulldog i like it like this

(Duration of option*price of option)/(duration of underlying*price of underlying)

= Option delta