Old Example: Hedge MBS Position with Treasuries

  • Buy $100 million FNMA 30-year 6% at $100-23+ and hedge 10-year Treasuries
  • From the table below
    • FN 6s have a 2.72 year duration
    • 10-year Treasuries with a 4.5% coupon is priced at $99-22 with a 8.17 year duration

 

Treasury Hedging Example

  • Now suppose interest rates rise 50 bps instantaneously, what is the profit and loss (P/L)?
    • From the table:

MBS = $99,031,250 - $100,734,375 = ($1,703,125)
Trsy = $33,594,688 $32,288,813 = $1,305,875
Total = ($1,703,125) +$1,278,750 = ($397,250)