R31 : using Treasury futures to hedge MBS

I got concepts about MBS hedging mainly from 2009 Schweser (note/q-bk). 2009 Schweser note of this reading was very much simplified and did not discuss 2-bond hedging very clearly. I am confused again and do not know if those concepts are correct. CFAI’s 2009 LOS(e) is deleted this year. I don’t know Schweser 2010 note of this reading is futher simplified.

CFAI 2010 LOS still has 2-bond hedge. You may refer to CFAI textbook for details.

B_C, Do you mean that my following concepts are wrong (from your previous post) ? DUR hedge : Interest rate rise (both exhibit positive convexity) => Sell futures Interest rate fall (MBS: - convexity, Treasury : + convexity) => Sell futures : will incur loss => Buy futures : Hedge can be archieved (may be not perfect) Your advice will be appreciated !

I asked this topic to schweser insturctor. for your ref. To hedge MBS’s interest rate risk, can the Duration based hedge used when MBS has positive Duration like normal bond. shall I short or long a future? TKS! CFA, CAIA - Level 3 Manager: When rates are high and negative convexity os not a factor, you can follow a “normal” hedging strategy. To hedge MBS’s interest rate risk, I have following thoughts, but not very sure, pls help. Two-bond hedge ,hedges both parallel shift & twist of yield curve . in the samples of notes, managers take short position of 2 bonds in notes’ example. can we see to hedge interesr rate risk, always short the future w/Two-bond hedge. CFA, CAIA - Level 3 Manager: Not always both short. Depends on the current level of rates, the shape of the yield curve, and the yield on the MBS. You could be long and short. Remember that Treasuries have positive convexity (the usual shape of the bond yield/price curve and MBS have a segment that exhibits negative convexity.

annexguy, So what shall be correct ?

AMC Wrote: ------------------------------------------------------- > annexguy, > > So what shall be correct ? all depends. not always short. and 2-bond hedge is best option for MBS. BTW, this afternoon, I did the 2009 CFAI sample exams version 1,2,3 purchased from CFAI website before 2009 exam, not the one free downloaded from CFAI this year. In the sample exam version 2, Yun Fan Case Scenario Q7-12 covers lots of area of this thread. It helps me understand them better.

annexguy, If you don’t mind, would you please send the 2009 CFAI sample exams version 2,3 purchased from CFAI website last year to my e-mail address : smkuo@aamcc.biz I purchased version 1 only last year. Thanks in advance.

AMC, As far as I understand… For two bond hedge. Your position can be short / long depends on whether the NH10yr and NH2yr you solved is positive or negative For DUR hedge. Your position should be short futures on treasuries as long as you are longing the MBS not shorting MBS. without considering the convexity problem…then… If interest rate rise => MV of both MBS and Treasuries fall => Gain from treasuries future offset MBS fall. If interest rate fall => MV of both MBS and treasuries rise => Gain from MBS offset future loss. => your position is hedged. But as we have discussed. This is not a good hedge due to convexity problem.

“The interest rate risk of a mortgage security corresponds to the interest rate risk of comparable Treasury securities (i.e., a Treasury security with the same dura- tion). This risk can be hedged directly by selling a package of Treasury notes or Treasury note futures.” quoted from the text book.

AMC Wrote: ------------------------------------------------------- >check your email.

Why does my PC upload the post so slow? never happened when L1 and L2. same thing on your PC?

Yes, same here.

annexguy Wrote: ------------------------------------------------------- > AMC Wrote: > -------------------------------------------------- > >check your email. No files are attached, would you please kindly send to me again ? TKVM for your kindness.