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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Mark Myword who wrote (221)9/27/1998 5:17:00 PM
From: Henry Volquardsen  Read Replies (1) of 2794
 
Optionality refers to something that has some feature that trades like an option or embeds an option. If a security has optionality it will require options to hedge it. In the case of mortgage back securities the optionality is the homeowners ability to pre pay the mortgage. For the lender this gives his portfolio option like characteristics since the borrower will start to prepay as rates decline, so the mortgage lender has effectively written a call on the mortgage.
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