Final Project FRL 3832

(a) Emailed project in Excel format due by Friday, Dec 13, 11:59pm. Late copes will NOT be accepted. I will check that the files readable by me within 24hrs, so check emails for confirmation of receipt. (b) Work in groups of 2. You MUST email me the composition of your group by 11:59pm, Tuesday 11/26 (give you final chance to form group by the end of the lecture that day). Penalty otherwise. Your partner cannot be the same person you worked with on the midterm project. (c) Also due by the same time as the project: anonymous evaluation of your team partner. I am not particularly interested in minor differences in contribution; rather I want detail if your partner was essentially/near/completely free-riding or acting irresponsibly with time management. Neither any comments nor the assigned evaluation grade will be disclosed. (d) 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. (e) You may use any source you find useful, except the help of another person (outside your group). The latter constitutes “cheating.” In particular, do not rely on me to answer questions by email, except if you are reasonably sure that the information given is insufficient. (f) 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. Answer the written questions on separate worksheets (use text boxes). The name of this file must be –-FRL3832-FinalProj.xlsx (substitute with the team member’s name). (g) There may be very minor changes (typo-level stuff) to the project, but this is unlikely, and you can (and are encouraged to) start on the project right away.

[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.