of the real estate assets to offset the losses from the loan. Through the securitization, the group of mortgages held by the group, e.g. a bank, is then grouped into a MBS and then sold off to investors as units or certificates. This process of passing on the group of mortgages to the investor is known as a ‘pass-through security’. The cash flows generated from the mortgages, net of the commissions charged by the originator of the mortgages, pass through the original financial institution through to the now, owner, of the security. Simply speaking, the now, owner of the security receives their share of the overall mortgage payments, by payment of both interest and principal. Mortgage pass-throughs differ from bonds as each cashflow from a mortgage pass-through will include both interest and principal, whereas typical bonds pay only interest, with the principal returned at the end of the tenor. Another key difference is that as the principal is reduced, the payments for each cashflow differ with time, hence the amount of interest received on each cashflow will decrease as the amount of capital declines on the principal. Hence since the security is self-liquidating, once all mortgages in the MBS's are paid, the investment is completed. This strategy is focused on traders receiving income rather than capital gains. In terms of mortgage arbitrage strategy, the trader invests in long term MBS's and hedges the risk on the interest rate by shorting government bonds or swaps. This is an attempt to profit from the MBS's yield being higher than the government bond yield. The reason that MBS's tend to have a higher yield is because of the general risk that the assets that they are secured by pose. This risk is default risk. Low interest rates pose a negative impact to MBSs. An environment with lower interest rates allows those with mortgages to make more prepayments, which consequently reduces the maturity of the loan, as well as the principal, resulting in less interest being earned from the asset, higher interest rates also negatively affect MBS, as an increase in interest rates effect the ability for individuals to make payments on their mortgage, which increases the risk of default. Lastly, the strategy can also face liquidity risks. An example of increased liquidity risk occurring would be in a climate whereby a crisis occurred (E.g. the GFC in 2008), whereby market liquidity begins to