In book 4, reading 31, i came across the two bond hedge topic. will we be asked to compute all the steps in the exam? if so, how do they get the average prices in the illutrations?
On page 177. textbook Vol 4 Here is the way to get average price. Fannie Mae 5% (MBS) for example. Price change when yield increase 97.787-99.126 = -1.339 Price change when yield decrease 100.334-99.126 = -1.208 Average price change (MBS) = (1.339+1.208)/2 = 1.274
there are two sets of averages 1. Change due to +/- shift. Average of change in price from current price. 2. Change due to +/- shift. Same as above.
but arent we supposed to incorporate the 50% probability of each scenario occuring? calculating simple averages was ok… i was getting stuck because i was incorporating 50% probability on each scenario…
amg, I would know how to do the calculations.
amg, not sure where you are getting the idea of 50% probability of each scenario occuring.
@ BTON04 - 50% probability is mentioned in the question (CFA text). anyways… i guess i was reading too much into it. i wil stick to the layman’s average calculations here