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Writing the first draft of financial history with Byrne Hobart
Complex Systems with Patrick McKenzie (patio11)
Understanding the Spread and Hedging in Financial Markets
In financial markets, the spread between mortgage rates and treasury bonds reflects the cost of options. Real money investors buy assets to hold long-term, while speculators profit from the spread by hedging risks. Mortgage holders often do not hedge their risk by adjusting their treasury futures contracts based on interest rate changes. Optimal hedging involves buying more treasuries when rates drop and selling when rates rise.
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