JPMorgan looks at hedging convexity risk.(frequency of dynamic hedging)

In a recent report, JPMorgan Securities studied the performance of dynamic hedging strategies to manage convexity risk in MBS portfolios. In the report, analysts examined the relationship between risk, returns and the frequency of dynamic hedging. They also examined the role of options in hedging convexity and vega risks. They said that looking at the difference between unhedged and hedged total returns effectively provides a synthetic asset total return index. Analysts also studied the historical performance of real and synthetric MBS, and made some conclusions about when synthetic assets are likely to outperform.

Analysts reiterated the importance of frequent dynamic …