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 6/14/19 and 9/15/19. A

Nov 23, 2019

Final Project

FRL 3832

You do not have to apply “excel rules” regarding tables an annotation, BUT ALL derived/dependent quantities MUST have Excel formulae so that I can tell how the values were obtained. Substantial penalty otherwise.

[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 6/14/19 and 9/15/19. 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 (this defines the “stated delay”).

In your submitted dollar roll screen, show the analysis for a PSA of 150, a forward drop of 15/32, and a reinvestment rate of 2% (act/360). Note however, that the spreadsheet should correctly compute the dollar advantage for any set of inputs (dates, gross and deal coupons, WAM, prices, balances, PSA, and reinvestment rates. Stated delay, original maturity, and rate conventions are fine to “hardwire.”).

Calculate breakeven rates for PSAs of 120, 150, and 180, and forward drops of -20, -15, and -10 (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? Discuss the hedging chain between the consumer and the final MBS investor.

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