Does anyone else agree that in the above mentioned explanation the statement about an increase in volatility providing positive outcomes to MBS holders is wrong? MBS have imbedded prepayment options which accrue to the borrowers in the underlying mortgage pools. As an MBS holder you have written a call, you are not long a call. As volatility increases, the price of the option increases which hurts your position in MBS (as the option writer). I submitted this to Schweser and haven’t heard back. I can’t decide if I am wrong or if they haven’t gotten around to getting back to me.
Can you post the whole question here ? I am using Schweser Practice Exam Vol 2 of 2009 and it seems that the question per se is different from yours.
naples111 Wrote: ------------------------------------------------------- > Does anyone else agree that in the above mentioned > explanation the statement about an increase in > volatility providing positive outcomes to MBS > holders is wrong? > > MBS have imbedded prepayment options which accrue > to the borrowers in the underlying mortgage pools. > As an MBS holder you have written a call, you are > not long a call. As volatility increases, the > price of the option increases which hurts your > position in MBS (as the option writer). > > I submitted this to Schweser and haven’t heard > back. I can’t decide if I am wrong or if they > haven’t gotten around to getting back to me. Your reasoning sounds correct to me.