Hedging/ Pricing

Question 0

trading- gains and losses

Answer 0

Sale of loan
Cross hedge
Options activity

Question 1

6 Mortgage Lending Risk

Answer 1

1 interest rate
2 product- no place
3 credit - investor default
4 fallout
5 basis price- inconsistent to the movement of mortgage
6 investor credit risk- fail to perform

Question 2

Commitment types

Answer 2

Optional delivery- best efforts

Mandatory- obligation

Question 3

Fallout impacts (6)

Answer 3

Lock periods
Pricing
Channel mix
Compensation practices

Question 4

Futures risk/ benefits

Answer 4

Contract to buy / sell
Us treasuries
High market volatility
Require margin acct and call
Risk to meet margin acct and call
High risk

Question 5

Options risks

Answer 5

Risk-Expensive
Benefits- helps cover pipeline in an increasing rate market
Use a lower % of mandatory coverage combined with put options

Question 6

2 types of options

Answer 6

Put-option to sell mbs
-gains value as rates rise and mbs prices fall
Call-option to buy mbs

Question 7

Future sales / mandatory

Answer 7

Risk- fallout in a decreasing interest rate market / pair off fee
Benefits- offers protection in a rate rising market

Question 8

Pipeline hedging methods (4)

Answer 8

• forward sales
• options
• futures- contract to buy or sell- us treasuries
• best efforts

Question 9

Risk types (3)

Answer 9

Fallout risk
Interest rate risk
Basis risk-difference in the coverage of the hedge

Question 10

Credit facilities-long term

Answer 10

• mortgage
• tbonds
• munis
• corp bond
• corp stock

Question 11

Credit facilities-short

Answer 11

Fed funds
Discount window
Dc's
T bill
Commercial paper

Question 12

Cmo

Answer 12

Collateralized mortgage options- mbs

Multi class

Question 13

Remic

Answer 13

Multi class mbs more flexible than a cmo

Question 14

Mbs 4 types

Answer 14

1) Pass through- payments direct to investor
- sale of an asset
- payments made regardless of amount revived
2) Mtg backed bond-investor retains rights ownership of pool. Investors purchase for interest income
3) special mbs- cmo/ remix
4) stripped mbs- principal and interest into separate securities

Question 15

Marketing products -3 ways to sell

Answer 15

1) whole loans
2) participation sales
3) mbs- pools to a security

Question 16

Secondary market manager responsibilities

Answer 16

Risk management
Pipeline management
Mortgage loan sales

Question 17

Inverted yield curve

Answer 17

Yield curve- rates for long term loans are higher than short term due to concern of default and inflation.

Invert yield curve- when supply exceeds demand the long term rates will lower.