Question: 10. Jane Hubert is using an analytical system purchased by her firm to analyze mortgagebacked securities. The analytical system uses the Monte Carlo simulation model

10. Jane Hubert is using an analytical system purchased by her firm to analyze mortgagebacked securities. The analytical system uses the Monte Carlo simulation model for valuation. She is given a choice when using the system to use either the ‘‘full Monte Carlo analysis’’ or ‘‘16 representative interest rate paths.’’

a. What is meant by ‘‘16 representative interest path paths’’?

b. How is the theoretical value of a mortgage-backed security determined when representative paths are used?

c. What is the trade-off when using representative interest rate paths versus using the full Monte Carlo analysis?

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