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MSR Convexity Risk Explained – Part 1
For hedging purposes, convexity risk is a very important driver of MSR hedge cost and effectiveness, but it is not necessarily an easy concept to grasp. The purpose of this paper is to describe MSR convexity risk in terms that are easy to understand, to illustrate how to identify convexity risk in an MSR rate shock profile and risk metrics, and to explain the relationship between MSR convexity risk and projected prepayment speeds.
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