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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Mark Myword who wrote (221)	9/27/1998 5:17:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to 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.