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Answer: A short American call option on the underlying pool of mortgages.
From an investor's perspective, a mortgage-backed security (MBS) is equivalent to holding: - A long position in a non-prepayable mortgage pool (the underlying asset) - A short American call option on the underlying pool of mortgages This is because the borrower (homeowner) has the right to prepay the mortgage when interest rates fall, which is economically equivalent to the borrower holding a call option on the mortgage. The investor is effectively short this call option, as they lose the higher-yielding investment when prepayment occurs.
Author: LeetQuiz Editorial Team
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From an investor's point of view, a mortgage-backed security is equivalent to holding a long position in a non-prepayable mortgage pool and which of the following?
A
A long American call option on the underlying pool of mortgages.
B
A short American call option on the underlying pool of mortgages.
C
A short European put option on the underlying pool of mortgages.
D
A long American put option on the underlying pool of mortgages.
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