Mortgage-backed securities are defined as securities whose investment returns are based on which one of the...

Mortgage-backed securities are defined as securities whose investment returns are based on which one of the following?

a	pool of mortgages
b	lease payments from the tenants of financied property
c	loan refinancings
d	condominium fees
e	interest only on mortgage loans

Wheat is currently selling for $6.15 a bushel while the 3-month futures price is $6.20. Hong Min Suk believes that wheat will actually sell for $6.45 a bushel 3 months from now. Which one of the following positions in wheat should he take today, given this belief?

a	sell in the spot market
b	sell in the futures market
c	take a long position in the futures market
d	take a short position in the futures market
e	take a short position in the spot market

Expert Solution

Answer-

The correct Option is e. interest only on mortgage loans.

The Mortgage backed securities (MBS) are a pool of martgages that pay periodic interest payments as returns that are generated by the mortgages.

The other Options are incorrect

Option a is incorrect as the pool of mortgages are collateral for MBS

Options b is incorrect as lease payments from tenants of financedproperty are taken by the MBS issuing firm but not the MBS investors.

Option c is incorrect as loan refinancings as it is a process of taking out a new loan to pay off previous loans.

Option d is incorrect as condominium fee is paid by all property owners of a condominium complex for maintenance costs.

Answer-

The correct Options are c and e. take a long position is futures market and take a short position in the spot market

As Hong Min Suk beleives is expecing the futures of wheat will sell for $ 6.45 / bushel 3 months from now which is higher that the 3 months futures price of $ 6.20 therefore it will be prudent to make a judgement of going long position in futures market to make a profit.
As the spot price of wheat is lower than the expected futures price therefore Hong shall take short position in the spot market.

The other Options are incorret.

Option a is incorret as one has to take short position in spot market.
Option b is incorrect as Hong should go long in futures market
Option d is incorrect as Hong should take long position not short position in futures market.

jeff jeffy answered 3 years ago

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