We measure mathematically how much coverage a pipeline needs at any given time and what mix of coverage (think Options and TBA forwards) are required to manage the position overall likely market moves. We calculate this potential market movement expectation from the implied volatility embedded into the prices of options traded in the US Treasury options market, which auto-corrects for the perceptions of all participants. Hence, if you are always long and/or don’t cover any portion of your pipeline’s position with options, you may have been lulled to sleep by the recent past’s lack of market volatility. Those with less than ten years of experience in the mortgage business may never have had to deal with a volatile market and may not expect or know how to deal with one in actual disaster (think about an instantaneous market movement of over 3 points.)
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