Mortgage Hedging - 2 years to sell and the volatility effect

CFA Level III
#1

I got something like 0.86; the highest of the choices. An educated guess at best. I was debating that one or the 0.42. For the volatility, as the volatility decreases, the value of the prepayment option decreases and the value of the MBS goes up!

#2

remind me, what was the first question?

#3

hedging a MBS with 2 yr and 10 yr treasuries…determining how many of the 2-year to sell.

#4

the 2nd one – Was that choice C?

#5

On my exam it was.

#6

ditto

#7

oh yeah, i screwed that up, i know.

#8

.86 million

#9

I added the difference in MBS and the 2 year bond for both parallel shifts and twists. Got 0.86 M.

#10

I got .86 million as well. Thank god I was tutoring a friend’s child in Grade 9 math and just refreshed on how to solve systems of equations.