How to resolve this Dollar Roll Matrix question using Excel

Anonymous
timer Asked: Nov 16th, 2016

Question description

(a) [20] Create a dollar roll matrix of breakeven rates for an agency MBS with gross and deal coupons of 8.035% and 7.5%, respectively, and settlement dates 6/14/16 and 9/15/16. Assume standard fully amortizing fixed rate mortgages with a term of 30:0, a WAM of 29:5 and an immediate price of 96-16. MBS CF’s are due the owner of record on the first of each month, but are paid on the 25th of that month.

In the hardcopy you send in, you MUST show the analysis for a PSA of 150, a forward drop of 35/32, and a reinvestment rate of 2% (act/360).

Calculate breakeven rates for PSAs of 120, 150, and 180, and forward drops of -40, -35, and -30 (32’s).

(b) [5] Discuss the risks of roll vs. hold from the perspective of the investor.

(c) [5] Why does the dollar roll market exist?


Nov 5, 2016 Due in class, Nov 17, 2016 Mid-Term Project FRL 383 (a) Hardcopies of your answers will be due at beginning of class Thursday, Nov 17. Late copes will NOT be accepted. See also (e) and (f) below. (b) Work in groups of 2. You MUST email me the composition of your group by 11:59pm, Thursday 11/10 (give you final chance to form group at the end of the lecture that day). (c) Include your name on the first page and back of last page (all pages if you don’t intend to staple them). Make sure that the layout is easily readable (e.g., do not have spreadsheets running over several pages; make sure it is logically arranged; ensure the font doesn’t require a microscope, etc.). The hardcopy should be sufficiently annotated to make it clear how you arrived at any particular number. Partial credit is hard to justify if all I see is a set of confused and/or wrong numbers. (d) You MUST email me your spreadsheets, before the due date/time. Do not email any spreadsheets you did not hand in. Send in only one excel file, combining any separate workbooks into one. Answer the written questions on separate worksheets. The name of this file must be --FRL383-MTProj.xlsx. (e) The hardcopy is the one that will be graded. The electronic version will be used to clarify any ambiguity, and check your project. [30pts total] Dollar Rolls. Should there be any missing input data/information use (and justify) any reasonable assumption. (a) [20] Create a dollar roll matrix of breakeven rates for an agency MBS with gross and deal coupons of 8.035% and 7.5%, respectively, and settlement dates 6/14/16 and 9/15/16. Assume standard fully amortizing fixed rate mortgages with a term of 30:0, a WAM of 29:5 and an immediate price of 96-16. MBS CF’s are due the owner of record on the first of each month, but are paid on the 25th of that month. In the hardcopy you send in, you MUST show the analysis for a PSA of 150, a forward drop of 35/32, and a reinvestment rate of 2% (act/360). Calculate breakeven rates for PSAs of 120, 150, and 180, and forward drops of -40, -35, and -30 (32’s). (b) [5] Discuss the risks of roll vs. hold from the perspective of the investor. (c) [5] Why does the dollar roll market exist?

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