𝔖 Bobbio Scriptorium
✦   LIBER   ✦

Valuing and hedging fixed rate mortgage commitments

✍ Scribed by Brian A. Maris; Harry L. White

Book ID
104644527
Publisher
Springer US
Year
1989
Tongue
English
Weight
548 KB
Volume
2
Category
Article
ISSN
0895-5638

No coin nor oath required. For personal study only.

✦ Synopsis

A fixed rate loan commitment that is binding on the lender but not on the loan applicant is equivalent to a put option. This article uses the Black-Scholes option pricing model to establish a value for fixed rate loan commitments and to derive the hedge ratio for the lending institution to hedge the interest rate risk associated with the commitments in the FHLMC forward market for mortgages. The effectiveness of the resulting hedge is tested in a simulation, where it is found that the result is a 71% reduction in the variance of the value of the lender's gain or loss associated with the commitment period.

πŸ“œ SIMILAR VOLUMES

Variable-rate loan commitments, deposit
Variable-rate loan commitments, deposit withdrawal risk, and anticipatory hedging
✍ G. D. Koppenhaver πŸ“‚ Article πŸ“… 1985 πŸ› John Wiley and Sons 🌐 English βš– 946 KB

he obvious elements in a bank's balance sheet that can benefit from the risk-T shifting possibilities of financial futures trading are nonloan assets such as \_ \_ government securities, or variable-rate deposits such as money market accounts (see Ciccehetti et al., 1981;Ederington, 1979;Franckle, 1

Valuing Risky Fixed Rate Debt: An Extens
Valuing Risky Fixed Rate Debt: An Extension
✍ Eric Briys and FranΓ§ois de Varenne πŸ“‚ Article πŸ“… 1997 πŸ› School of Business Administration, University of W 🌐 English βš– 261 KB