which could be the the likely reason that hedged mortgage securities portfolio earned a positive return over the hedging period despite the net loss on the hedge. anyone could elaborate a bit more?
mortgage securities have prepayment risk which you get rewarded for taking. mortgage securities are not as liquid mbs dont have the same credit guarantees as treasuries mbs are not as useful for securities lending and probably a bunch of other reasons
Remember the reason to hold MBS’s is to capture the Spread over Treasuries, hence you should NEVER hedge MBS Spread… I just saved you 3 pts.
yeah, got that right by remembering - “hold MBS’s is to capture the Spread over Treasuries” but when I come across something new, better check it out - this exam is really detailed.