From a post earlier - someone listed each of the risks and then how to hedge for MBS. I have done a similar summary - could someone please check that this right? Spread risk - don’t hedge this as if OAS narrows, MBS with increase in value. If you expect OAS to widen then underweight MBS Interest rate risk - sell futures irrespective of IR direction of change - you want to hedge exposure to interest rate/duration risk, and selling futures will reduce duration Model risk - too difficult to hedge Prepayment risk - hedge dynamically using futures. If rates have declined, you can buy futures (you need more futures than before as more price variability), if rates have increased, you can sell futures (you don’t need as many, as price variability is less) Volatility risk - hedge dynamically by buying options if vol increases (these will increase in value to offset the decrease in MBS value), if vol is expected to decrease then hedge with futures instead??? Yield curve risk - hedge with a 2 bonds - hedging at 2 key rate durations therefore a better hedge than just one bond I find this stuff really confusing, so any help is gratefully received!
Can anyone help with this?
I only read the first one and stopped, if you expect spreads to widen, add to your MBS position b/c they will be undervalued.
^^ it all depends on it you are currently holding them or not, if spreads widen when you hold a position then you lose, if you are looking to buy and spreds widen that may mean they are undervalued since if you purchased them you can expect spreads to narrow and prices go up.
Dollar cost averaging :). If you are a LT investor you should not sell just b/c MBS spreads are widening you want to add to your position to get the higher Yields plus you should benefit with reversion to the mean. Also, if you sell you will be selling into a decreasing mkt, which isnt going to help.
this is how i remember it: Some Idiots Purchased Variable Mortgages that leaves out yield curve risk…schweser leaves that out of their list of their mtg sec risks even though it applies
I like: Ms. VIP, sh;e a Model!! Model spread Vol. Interest rate Risk Prepatment
i’ll save ms vip for after the exam…
bigwilly Wrote: ------------------------------------------------------- > Dollar cost averaging :). If you are a LT > investor you should not sell just b/c MBS spreads > are widening you want to add to your position to > get the higher Yields plus you should benefit with > reversion to the mean. Also, if you sell you will > be selling into a decreasing mkt, which isnt going > to help. I never said to sell I just said you lose but good point but I don’t see them testing this material like this on saturday but what the he!! do I know…