is not efficiently exercised. Because mortgage-backed securities are backed by hundreds or thousands of individual borrowers, these securities are not "called" in the same way that a callable corporate or agency debt security is called. The MBS holder receives the prepayment of principal on only the percentage of underlying loans that are actually prepaid by the underlying borrowers. In times of falling interest rates, prepayment rates generally increase but there is usually some significant percentage of borrowers who do not take advantage of the opportunity to refinance into a lower mortgage rate. There are several reasons why someone would not refinance despite the economic incentive to do so, including credit impairment, refinancing costs, tax implications, or a lack of knowledge regarding the refinancing opportunity. Due to the complexity of the prepayment option embedded in mortgage-backed securities, market participants have developed sophisticated models that attempt to predict the percentage of a mortgage pool that will pay off given a series of market variables, security characteristics, and prepayment history. Despite the best intentions of many we 11-respected statisticians, there is not a perfect prepayment model. This is because the coefficients of the variables that determine prepayment behavior and even the variables themselves change over time. Also, even if the model does a good job of predicting the average prepayment rate for a subset of the mortgage universe, individual pools of mortgages will have realized prepayment rates that could deviate substantially from the average just due to the random sampling of loans out of a larger distribution. The imperfect nature of prepayment models gives way to the existence of prepayment risk. Prepayment risk is not the risk that prepayment rates increase if interest rates fall and some portion of the security's principal is paid off in a lower-rate environment. This phenomenon is captured by the volatility risk of the security in the same way that a standard callable bond pays earlier if interest rates fall. In other words, if the prepayment option were exercised efficiently and we could perfectly predict the level of prepayments given a set of variables, then there would be no prepayment risk. There would be only volatility risk. We define prepayment risk as the return volatility arising from the over- or underestimation of actual prepayment rates. There are a number of measures that can be used to quantify prepayment risk. One measure is prepayment duration, which is defined as the percentage change in price due to a 10 percent increase in projected prepayment rates. Different MBS securities can have very different levels of prepayment duration, including both positive and negative exposures. Typical mortgage-backed pass-throughs have prepayment durations that range between -0.1 and -0.6. Structured securities that have a more leveraged exposure to prepayment risk can have much larger levels such as interest-only strips with prepayment durations ranging between -6.5 and -9.0, and principal-only strips exhibiting prepayment durations of 2.0 to 2.5. Currency Risk Currency risk is the exposure that an investor bears when investing in financial instruments denominated in a currency that is not the investor's base currency. Although not specific to the fixed income asset class, currency risk is prevalent in