Mortgage hedging drives vol

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Mortgage servicers’ and investors’ need to hedge their exposure to the continuing onslaught of US mortgage refinancing in recent months increased volatility in the US options market to record levels in late September and early last month.

The refinancing boon has forced mortgage players such as Fannie Mae and Freddie Mac to scramble to hedge their convexity risk. In particular, dealers say Fannie Mae’s need to close its duration gap, which hit 14 months in August, its widest level ever, was

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