Schweser SS 10 p. 230 book 3 Talking about hedging MBSs: One strategy would be to hedge away the risk caused by movements in T-bond yields (ie IR risk). This leaves the manager with a risk-free rate of return plus the spread… …The strategy would be: If the spread increases, increase the exposure to mortgage securities If the spread decreases, decrease the exposure to mortgage securities ***************************** If you are long the MBS and you hedge the interest rate risk and the remaining spread widens, you lose, no? Are they talking about new cash here? They have to be…
I think they are talking about new money. They are basing the buy / sell decision on current vs. historical spreads.
That makes sense. I can’t answer any of the questions you put up tonight. : (
mwvt9 Wrote: ------------------------------------------------------- > That makes sense. > > I can’t answer any of the questions you put up > tonight. : ( That’s alright. Schweser hit me with a couple of doozies right off the bat tonight.
My 2 cents … I think its about reversion to the mean. If spread increases buy more, hoping spread will narrow and vice versa. Cheers 
I think risk here meant more for price risk. As the spread increase, price of MBS drop. and we should by more low price MBS.