2011 AM Essay Q 5

The guideline says that Finnegan’s mortgage payments are intereset rate sensitive. That doesn’t make sense to me . She owns a call option if anything in her mortgage , and if rates rise , the mortgage is her friend because the value of the mortgage to her will rise. If she creates an interest rate hedge for her mortgage she would only lose the only advantage she has .

Am I making any sense?

She has a variable rate mortgage. She also owns a call option. However, how interest rate rise can be her friend when she has to pay more (interest)?

She should hedge for rising of interest. And has call opt when int decrease

Ok understood , I didn’t read the question well.