Dynamic Hedging: need confirmation

CFA Level III
#1

When CFAI talks about options, it talks about options on bonds, correct?

#2

Dynamic Hedging In CFAI terms = Futures I thought??

#3

bigwilly, yes, you are right, i am talking Dynamic hedging vs options. Are options calls on bonds?

#4

i think is mentioned nowhere… but in my opinion, since the options inside the MBS are options on bonds (call option on the bond), you should offset it with other options on bonds too, not interest rates

#5

yes. Buy calls to offset drop in value of MBS when vol. increases.

#6

i hope you are not confusing it with delta hedging.

#7

thanks mo34, for some reason CFAI doesnt bother to say what options are written on so we have to guess

#8

i didnt think you bought calls…you bought puts because which would be the equivalent of shorting treasuries when hedging MBS…am i off? the hedge ratios usually imply shorting 2 different tsy futures to offset MBS.

#9

you need to buy calls to extend duration when Iterest rate decline

#10

why are your hedge ratios usually negative then? it irked me that you shorted tsy futures and when rates fell your MBS had negative convexity AND you lost on your hedge…maybe i need to reread that but i always thought you shorted because you were long MBS…