Do we have to calculate the number of 2yr and 10yr treasuries required to hedge mortgage passthroughs with negative convexity? LOS seems qualitative to me.
We had to do a two bond hedge calculation last year in one of the mocks and pretty sure it showed up on the exam too (I think it was multiple choice though).
The LOS that might relate are: 31. b. explain the risks associated with investing in mortgage securities and discuss whether these risks can be effectively hedged; 31. d. compare and contrast duration-based approaches with interest rate sensitivity approaches to hedging mortgage securities. Neither are quantitative. Does anyone see an LOS that relates to two bond hedges that would indicate “calculate” or “evaluate” or another quantitative command word? Have these LOS changed since last year?
I totally skipped this section. Too complicated and hopefully this won’t show up. Can somebody please touch on a few main-points on the two bond hedge for MBS?
2 bond hedge: do both of these: 1. short a long maturity treasury bond 2. long a short maturity treasury bond. no calculations needed according to schweser.
bobsters Wrote: ------------------------------------------------------- > > no calculations needed according to schweser. That’s what I was banking on, but mwvt9’s warning has me a little worried about skipping it. Maybe I’ll go back to it closer to the exam.
i remember schweser said that calculations are “no longer needed this year” … so sounds like it got removed from the syllabus this year! might be worth checking that though
bobsters Wrote: ------------------------------------------------------- >i remember schweser said that calculations are “no longer needed this year” … so sounds >like it got removed from the syllabus this year! might be worth checking that though They said that last year as well… Apparently the calculations were needed because CFAI went all out with the two bond hedge question last year. We had to know the calculation in order to get the points. I’m surprised Schweser hasn’t made an adjustment in their notes accordingly…
McLeod81 Wrote: ------------------------------------------------------- > bobsters Wrote: > -------------------------------------------------- > ----- > > > >i remember schweser said that calculations are > “no longer needed this year” … so sounds >like > it got removed from the syllabus this year! might > be worth checking that though > > They said that last year as well… > > Apparently the calculations were needed because > CFAI went all out with the two bond hedge question > last year. We had to know the calculation in > order to get the points. I’m surprised Schweser > hasn’t made an adjustment in their notes > accordingly… This is what I recall too.
mwvt9 Wrote: ------------------------------------------------------- > McLeod81 Wrote: > -------------------------------------------------- > ----- > > bobsters Wrote: > > > -------------------------------------------------- > > > ----- > > > > > > >i remember schweser said that calculations are > > “no longer needed this year” … so sounds > >like > > it got removed from the syllabus this year! > might > > be worth checking that though > > > > They said that last year as well… > > > > Apparently the calculations were needed because > > CFAI went all out with the two bond hedge > question > > last year. We had to know the calculation in > > order to get the points. I’m surprised > Schweser > > hasn’t made an adjustment in their notes > > accordingly… > > This is what I recall too. CFAI have the 2 bond hedge question in their ECQs too - a case of ignore at our peril by the looks of things. Sheeeeet K
My $0.02. There was a test question calling for the calculation of the two bond hedge in last years exam. Schweser stated in their notes that it would be too difficult to calculate on the exam and would not show up, which was unfortunately incorrect. In this years materialy, I noticed that CFAI dedicated a whole section to it and feel that they did it for a reason. I am guessing it will show given the turmoil in the non-agency MBS markets over the last two years. I sometimes wonder if CFAI decides to test things that Schweser and Stalla state will not be tested just to jack with us. Mark
can somebody tell me which los this actually is and where in the CFAI book i can find that? and another question is about IO Strips, are this passthroughs or paythroughs?
yellayella Wrote: ------------------------------------------------------- > can somebody tell me which los this actually is > and where in the CFAI book i can find that? > > and another question is about IO Strips, are this > passthroughs or paythroughs? Volume 4, pages 177-184. Yeah, it’s that long.
bobsters Wrote: ------------------------------------------------------- > 2 bond hedge: do both of these: > > 1. short a long maturity treasury bond > 2. long a short maturity treasury bond. > > no calculations needed according to schweser. you meant short 2 treasury bond right?
Just for those who do think this section is important esp the calculation and will study it, I felt the CFAI book was far better than Scheweser at explaining the concepts and calculations.
dkitty Wrote: ------------------------------------------------------- > bobsters Wrote: > -------------------------------------------------- > ----- > > 2 bond hedge: do both of these: > > > > 1. short a long maturity treasury bond > > 2. long a short maturity treasury bond. > > > > no calculations needed according to schweser. > > you meant short 2 treasury bond right? I agree w/bobsters, hedge with a short position in both the 2-year and 10-year Treasury security
chelseace Wrote: ------------------------------------------------------- > Just for those who do think this section is > important esp the calculation and will study it, I > felt the CFAI book was far better than Scheweser > at explaining the concepts and calculations. It was on the exam last year. Schweser helped none. I’m glad I looked at the CFAI text.
dkitty Wrote: ------------------------------------------------------- > bobsters Wrote: > -------------------------------------------------- > ----- > > 2 bond hedge: do both of these: > > > > 1. short a long maturity treasury bond > > 2. long a short maturity treasury bond. > > > > no calculations needed according to schweser. > > you meant short 2 treasury bond right? I think (can be wrong) one of the old threads says you are either: --Short both long and short maturty treasuries --Short a long maturity treasury and long a short maturity treasury It depends on the shape of yield curve. BTW, I would say get familiarized with the calculation thr. CFA text. It is really not that bad comparing to other course materials and calculations.
Good times!
wow, we gotta do that whole process? I can’t even figure out how to solve the two equivalent equations deal - my algebra skills are long gone.