Can someone explain what market directional means? I’m still a bit confused, even reading CFAI SS 9 several times. help please. thanks.
Can you provide a bit of context?
Must be the MBS material.
market directional, i assume means trend following. or if the markets are going up, you’re going to buy into it. But then again I have no idea of what the context is.
SS9 is 2nd part of FI material. It has a section talk about hedgeing option (shortfall) for MBS. Without hedgint, MBS are market directional in a sense that when interest rate go up, MBS value go up (well, performe better than bullet bond); when interest rate go down, due to the optionality and negative convexity, MBS value go down (well, under perform compare to bullett bond).
The only reason MBS will perform better when interest rates go up is because it has lower duration then bullet bond. ws is right that CFAI means that when IR goes down MBS underperforms, so you want to hedge this risk out using either dynamic hedging or options.
comp_sci_kid Wrote: ------------------------------------------------------- > The only reason MBS will perform better when > interest rates go up is because it has lower > duration then bullet bond. is outperfermance mainly due to the widening up of OAS when rate’s up rather than duration differential? my impression is the payoff line for mbs in the right hand side doesn’t have much of difference from that of pullet’s. duration differential becomes apparent when rate goes down (meaning at the left hand side of the curve).
hmmmm, that too, but option is already deep out of the money and would probably make no difference at high yields? who knows, i think both factors play a role
You are both right! Once option is deep out-of-money. MBS acts very much like a bullet bond. The underperformance and outperfermance is at those saddle points.
comp_sci_kid Wrote: ------------------------------------------------------- > The only reason MBS will perform better when > interest rates go up is because it has lower > duration then bullet bond. > > ws is right that CFAI means that when IR goes down > MBS underperforms, so you want to hedge this risk > out using either dynamic hedging or options. Actually MBS will overperform treasuries when interest rates go up only as long as interst rates are below the MBS yield, and it’s because of the negative convexity and not the duration.
mo34, agreed, as long as interest rates are betlow them MBS yield
Hey, Kleine, nice to meet you at the LA Seminar, I think your tattoo gave you away 
Hey Grexan, what do you mean? I don’t get the direct correlation between kleine and tattoo.
Probably best if we discuss this offline, in case you are curious email me at “uclafemba at y a h o o d o t c o m” Label subject “cfa” so it doesn’t get thrown in spam filter
I thought market directional was a hedge fund or active management approach that takes specific bets on which way the market is likely to turn in the short or medium term (as opposed to hedging or hugging a benchmark). I can see how an interest rate view would inform how you are balancing treasuries vs corps vs ABS/MBS, but I don’t know how it is related specifically to MBS.
pinged you.