Could anyone please explain what a cuspy-coupon bond is and how it works?
Bond on the cusp of getting u hurt.
Rates are such that a minor decrease in rates will cause major prepayment.
they are most susceptible to negative convexity.
It’s an MBS whose coupon is very close to market rates.
The important thing is: while in other MBS “environments” you would use that 2-bond hedge, in cuspy coupon, you MUST use options to hedge (why? large gamma!)