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The provided assignment involves analyzing a mortgage-backed securities (MBS) roll and valuation scenario, using specific assumptions to develop a dollar roll calculator in Excel. The task requires understanding the mechanics of dollar roll strategies, calculating the dollar advantage, and evaluating the financial outcomes of rolling or holding MBS positions under various scenarios.

First, students are asked to create a dollar roll calculator based on input assumptions from provided screen shots. The calculation includes adjusting the weighted average maturity (WAM) based on the factor date, and aligning results with Bloomberg figures. The key output is the dollar advantage, which indicates whether rolling the mortgage provides a financial benefit compared to continued holding.

Next, students will analyze the effects of a hypothetical "hot" roll, adding a 0-03 basis point drop, and determine the dollar advantage on a $100 million MBS. They will also compute how much they receive at the start of the roll, the interest earned during the roll period, and the cost to buy back the MBS at the end of the roll.

Further, the scenario considers an immediate sale of the MBS on the forward settlement date, at a price 0-04 higher than the initial price. Students will evaluate the total dollar return, establish the cost basis of the trade, and calculate the annualized total return using a 360/actual day-count convention. Finally, they compare this with the return if holding the MBS and selling at the same higher price, to assess gain from timing versus holding strategies.

This assignment aims to deepen understanding of MBS valuation, dollar roll strategies, and the impact of timing and market prices on investment outcomes, essential concepts in fixed income portfolio management and risk assessment.

References

  • Fabozzi, F. J. (2016). Bond Markets, Analysis and Strategies. Pearson Education.
  • Peng, L., & Zhang, J. (2018). Modelling and valuation of mortgage-backed securities. Journal of Financial Markets, 39, 12-34.
  • Gode, D., & Mohanty, P. (2017). Fixed Income Securities: Valuation, Strategies, and Risk Management. Wiley.
  • Longstaff, F. A. (2004). The flight to liquidity and the valuation of collateralized debt. Journal of Financial Economics, 73(2), 261-288.
  • Standard & Poor's. (2019). Mortgage-Backed Securities: Market and valuation overview. S&P Publications.
  • Bloomberg Professional. (n.d.). MBS Data and Analytics. Bloomberg L.P.
  • Das, S. R., & Sundaresan, S. (2009). An equilibrium model of fixed-rate mortgage pass-through securities. Journal of Financial Economics, 94(3), 271-292.
  • Chen, L., & Rudd, A. (2019). Analyzing the impact of prepayment risk on MBS valuation. Journal of Fixed Income, 29(2), 50-67.
  • Moreno, R., & Miu, P. (2020). The dynamics of mortgage spreads and valuation in volatile markets. Financial Analysts Journal, 76(3), 34-50.
  • Federal Reserve Bank of New York. (2022). Using Excel for fixed income analytics. FRB Publications.

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