CFA CFA Level 3 2012 CFAI exam AM – Q7E (Dynamic hedging vs options hedging for interest rate risk of MBS)

2012 CFAI exam AM – Q7E (Dynamic hedging vs options hedging for interest rate risk of MBS)

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    • Alta12
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      @vincentt @ravivooda @Sophie

      Given: A portfolio of government bonds and MBS securities with the same duration. PM forecast interest rate volatility will rise significantly and yield curve will shift downward in a parallel fashion. She is very confident in her volatility forecast and less confident in her yield curve forecast. She considers the OAS on the MBS to be attractive. To isolate the OAS, she decides the interest rate risk of the MBS.

      Q: Should dynamic hedging or options hedging be used.
      A: Options hedging – but I don’t understand why. Please help!!

      Thanks.

    • RaviVooda
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      As volatility increases prices of options go up, since she is more confident on her volatility forecast good to go with options

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