Mortgage Hedging - 2 years to sell and the volatility effect

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!

remind me, what was the first question?

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

the 2nd one – Was that choice C?

On my exam it was.


oh yeah, i screwed that up, i know.

.86 million

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

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.