hi, I am trying to understand: MBS two bond hedge - when to use a combination of long position in 2-year treasury note and a short position in 10-year treasury note; when to use short position in both 2-year and 10-year treasury? Thanks,
As i understand it, there are two methods to execute a 2-bond hedge: 1. long a 2-bond hedge, long a 10-bond hedge and short an MBS security 2. short a 2-bond hedge, short a 10-bond hedge and long an MBS security never came across this version where we can long a 2-yr bond and short a 10-yr bond. where is this section covered?
As i understand it, there are two methods to execute a 2-bond hedge: 1. long a 2-bond hedge, long a 10-bond hedge and short an MBS security 2. short a 2-bond hedge, short a 10-bond hedge and long an MBS security never came across this version of 2-bond hedge where we can long a 2-yr bond and short a 10-yr bond in the same transaction. where is this section covered?
sorry about posting twice.
just opened the CFA Book 4, page 177, illustration 2 bond hedge with a long and short position. i havent read it either!
happyking02 Wrote: ------------------------------------------------------- > hi, > > I am trying to understand: MBS two bond hedge - > when to use a combination of long position in > 2-year treasury note and a short position in > 10-year treasury note; when to use short position > in both 2-year and 10-year treasury? > > Thanks, write a system of linear equations and solve it.
maratikus, i understand the mechanics, and i am asking for insights and different occasions of using the two different hedging strategies.
FYI: There was an LOS last year that specifically asked about a 2 bond hedge for duration v. interest rate twist, but that LOS was eliminated this year.
sjuhawk, thanks for pointing out this. You are right, the Los on 2 bond hedge is no longer included this year, but the text content is still in the CFAI book.
happyking02 It is probably a bit misleading to call them as two different strategies. They are essentially same strategy: using two bonds with different durations to hedge against level changes and twist changes of your MBS portfolio (i.e., it assumes you are long on MBS). You can use it to protect when you are short on MBS portfolio as well. Whether you long or short the 2 yr or the 10 year and how much depends on the solution of the two variable equation set, and is difficult to generalize.
elcfa Wrote: ------------------------------------------------------- > happyking02 > > It is probably a bit misleading to call them as > two different strategies. They are essentially > same strategy: using two bonds with different > durations to hedge against level changes and twist > changes of your MBS portfolio (i.e., it assumes > you are long on MBS). > > You can use it to protect when you are short on > MBS portfolio as well. > > Whether you long or short the 2 yr or the 10 year > and how much depends on the solution of the two > variable equation set, and is difficult to > generalize. I agree, technically it depends on the two equation set given the inputs (price changes based on simulation), but i thought they apply to different interest rates environments. The good thing is that it doesn’t seem matter too much for the exam.
happyking02 Wrote: ------------------------------------------------------- > elcfa Wrote: > -------------------------------------------------- > ----- > > happyking02 > > > > It is probably a bit misleading to call them as > > two different strategies. They are essentially > > same strategy: using two bonds with different > > durations to hedge against level changes and > twist > > changes of your MBS portfolio (i.e., it assumes > > you are long on MBS). > > > > You can use it to protect when you are short on > > MBS portfolio as well. > > > > Whether you long or short the 2 yr or the 10 > year > > and how much depends on the solution of the two > > variable equation set, and is difficult to > > generalize. > > I agree, technically it depends on the two > equation set given the inputs (price changes based > on simulation), but i thought they apply to > different interest rates environments. > > The good thing is that it doesn’t seem matter too > much for the exam. The ECQ has short both the 2yr/10yr Treasuries, pretty long winded calculation too, I might add. Likely to be this detailed on exam day? L