Sample exam 2 (paid #1) “The appropriate action to hedge interest rate risk is to sell treasury futures” I think this is not correct all the time, since in a 2-bond hedge, you might need to LONG a treasury futures. See the value of H2 in p.67, CFAI vol 4. Thoughts? - sticky
I thought 2 bond hedge you always short two treasuries based on their duration and yield curve risk that combines to match that of the MBS
No with 2 bond hedge, I think there can be times when you go long one end but short the other… So i think Sticky is right. BUT I think with regrads to the question, maybe they were considering a single bond hedge or a non MBS?
Sticky the answer was Incorrect, so why are you buggin?
bigwilly Wrote: ------------------------------------------------------- > Sticky the answer was Incorrect, so why are you > buggin? no, the statement is correct according to exam 2 (paid 1). I agree with that MOST OF THE TIME, but I think there can be exceptional case, eg. the 2-bond hedge case as also described in the CFAI text — you may need to long a treasury to hedge interest rate risk with MBS. That’s why I am asking. - sticky
I don’t know the question but it sounds like you are reading into it too much. Long interest rate = Hedge = sell futures
If htis is the same quesiton we are talking about is was Incorrect b/c of the prepayment option which will cause the treasuries to rise more than the MBS making the hedge ineffective… Q#7 right?
Q8. - sticky
So that’s why we are on different Questions 
HAHA! I said Incorrect TOO!!! I think I went with D… So I agree with you Sticky. Doesnt Question #7 agree with us??
Ignore my #7 in the most recent post, as it was referrign to a different statemetn…
sticky, I am with you on all of those “questionable” questions from Sample #2. I also thought in terms of two-bond hedge and that you don’t necessary short both treasury futures.
tanyusha Wrote: ------------------------------------------------------- > sticky, I am with you on all of those > “questionable” questions from Sample #2. I also > thought in terms of two-bond hedge and that you > don’t necessary short both treasury futures. alright. at least somebody is telling me that I don’t have the wrong concept — which is more important. thanks. - sticky
or that both of us have the wrong concept 
No, sticky after looking at #8 I agreed with you, b/c I said he was Incorrect also…
If someone told me that they needed to go long some treasury futures to make their MBS hedge work, I would send them back to the drawing board. That just can’t be an optimal or even half-decent thing to do.
JoeyDVivre Wrote: ------------------------------------------------------- > If someone told me that they needed to go long > some treasury futures to make their MBS hedge > work, I would send them back to the drawing board. > That just can’t be an optimal or even half-decent > thing to do. JD, this is for the case with 2-bond hedge of MBS. p.67, CFAI vol.4: (after the calculation for “amount” of 2-yr and 10-yr futures) “H2(for 2 yr) = 0.612478 and H10(for 10-yr) = -0.906945” Meaning that 2-yr futures to be LONGED while 10-yr is to be shorted (as “normal”) CFAI text then even says: “Notice that we have an example here of going long in a futures contract despite that we are seeking to hedge a long position!”
So we are right Sticky!!! But the problem is that if this was on the test, we would never be able to dispute this and receive credit!!!1
sticky Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > If someone told me that they needed to go long > > some treasury futures to make their MBS hedge > > work, I would send them back to the drawing > board. > > That just can’t be an optimal or even > half-decent > > thing to do. > > JD, this is for the case with 2-bond hedge of > MBS. > > p.67, CFAI vol.4: > > (after the calculation for “amount” of 2-yr and > 10-yr futures) > > “H2(for 2 yr) = 0.612478 and H10(for 10-yr) = > -0.906945” > > Meaning that 2-yr futures to be LONGED while 10-yr > is to be shorted (as “normal”) > > CFAI text then even says: “Notice that we have an > example here of going long in a futures contract > despite that we are seeking to hedge a long > position!” I’m sure that sufficiently constrained they would have to do that. If you walked into any mildly competent risk management department and suggested that, everyone would chuckle.
that was the reason why I asked about interest rate risk and yield curve risk. In this Q CFA asked us about hedging only interest rate risk (parallel change) - that’s why we need to short futures. of course, it’ll not help us with hedging against twists as well as prepayment risk. but it seems that we all complicated this question…