%0 Journal Article %A Joseph R. Prendergast %T The Complexities of Mortgage Options %D 2003 %R 10.3905/jfi.2003.319336 %J The Journal of Fixed Income %P 7-24 %V 12 %N 4 %X Mortgage option prices behave quite differently than the prices of options on underlying securities that do not exhibit significant convexity. As a result, the intuition of many market participants about option risk characteristics does not typically apply to mortgage options. The author explores and quantifies the risk characteristics of these options. The negative convexity of the underlying mortgage and the positive gamma of the option impact call option convexity in opposing directions. As a result, call option convexity can be either positive or negative, depending on the interest rate scenario and option specification. On the other hand, a mortgage put option is always positively convex. A quantitative understanding of these risk characteristics is critical for money managers and broker/dealers who use mortgage options. %U https://jfi.pm-research.com/content/iijfixinc/12/4/7.full.pdf