Question: True or False. (a) A key factor in valuing a mortgage pool/MBS is the rate at which the underlying mortgages will prepay. (b) When rates

True or False.

(a) A key factor in valuing a mortgage pool/MBS is the rate at which the underlying mortgages will prepay.

(b) When rates fall, typically MBS prices go up at a decreasing rate due to prepayment (negative convexity).

(c) At a given strike that is less than the current stock price (i.e. K < S0), the implied volatility of the European put is generally higher than the implied volatility of the European call due to market fears of crash risk.

(d) One reason for the implied volatility smile is the possibility of a black swan market crash.

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