One more thing: The gain you make when you buy the future will be higher given the fact it only have positive convexity.
dynamic hedging = futures, right? My brain says Options, but I think its Futures…
i am with you, head is muddier every day.
yes it is futures…
YES Bigwilly. Dynamicallly hedge = Option. Have a beer and you will be fine.
which page of the book is that? I need to read teh whole thing again.
OOOOPS sory! Dynamically hedge = Futures I need a drink, maybe some vodka.
or a Stiff martini.
Dude either one will be fine, I must have a drink to take control of my blood presure.
>>YES Bigwilly. >>Dynamicallly hedge = Option. Have a beer and you will be fine. WTF? dynamically hedge = option?? we’re not starting over here - - either dynamically hedge or buy options - not the same thing here - - think everyone got comfortable yesterday on the fact that this question requires a dynamic hedge approach to hedge the MBS position (and the answer is to buy futures) - - i looked a the CFA stuff last night and just saw a reference to fact that you had to dynamically hedge - - no explanation as to why you buy or sell futures though - - maybe i’ll ping the schweser folks - see what they know
cvillecfa: Sorry for the confusion, I am just loossing it. I need some sleep and a drink.
cvillecfa he corrected himself…
I still think it is NOT MBS futures - I own low MBS futures, why I buy high MBS futures? (vol low, MBS high) The question is to hedge vol risk - so, any future that has low vol, I will buy to lock in this low vol, that’s it.
Dude: stop confusing ppl with that think, we are so done with think. keep it in your heart and know it for the exam. you buy the future because you want to increase your duration since this bond has a negative convexity. Therefore, when interest decline, its duration decline faster that the treasury. Moreover, Always remenber that you that as a PM when you believe that the volality will lower than what it implied. OKKKKK
WHat ever happened to the 2-bond hedge in this situation? Schweser always throws questions into their exams that you’ve never been exposed to. I got this question wrong as well; my thinking was the strategy was inappropriate because the 2-bond hedge was more suitable.
sorry - - saw the correction - - have the email into schweser - -come on Schweser - - hope it’s not some vague answer - - usually when i miss a question i can reason through it - - this is really bugging me foxie - no doubt it’s not mbs futures (they don’t exist, right?) - - you’re hedging thru treasury futures here - - maybe i’ve been thinking about this so much i’ve totally screwed up what the question was even asking?? - - - but anyhow, fundamental brain gap here is around fact that i would never hedge a long MBS position with a long futures position - - is the question focused on just a single part of the 2 bond hedge?? maybe buy the 2 year futures based on the volatility aspect and short the 10 year for the duration - - is that what you’re saying foxie and what csk was saying earlier and i’m just too thick?
To me the appropriate hedge is to short a 2-year and short a 10-year.
tibwa - - my heart is too full at this point - - not going to help me to simply memorize this kind of stuff - formulas fine - - if i am completely backwards on how to hedge, what mbs securities are and how you effectively hedge those, i’m screwed - - this stuff won’t be asked in exactly the same form as it was on the practice test - - gotta understand it DUDE OKKK? in any event, i’ve emailed schweser and since i paid them so much, i will make sure i understand this before i’m done with them
I know, I know But guess what , when you study for an exam, you do the best you can. I know you have been working hard. I only hope this question do not show up at the exam. Even though i think I understand, I can still missed it up.
spent a hour on these to review all relevant readings, it’s worth it… will never miss these kind of Q again!!!