MBS Trading Dollar Roll

timer Asked: Nov 17th, 2016

Question description

[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.(use one million start like example in BOA)

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?

) 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 <last name_1>-<last name_2>-FRL383-MTProj.xlsx.

). 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.

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