Asset Backed Securities: Assessment and Management of Risk

Course Outline

This intensive and participative 2-day programme covers the key elements of asset-backed securities and in particular mortgage backed securities. Terminology, procedures, models and applications of ABS concepts will be included along with the latest products used for hedging the risks and for developing new markets. The first day will cover the risk factors,  prepayment models and measures of risk sensitivity while day two will deal with advanced structured instruments such as balance guaranteed swaps, and equity release mortgages.

Who The Course is For

  • Risk Managers
  • Portfolio Managers
  • Hedge Fund Managers
  • Structured Product Desks, Product Controllers and Researchers
  • Rating agencies involved with mortgage backed securities

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Prior Knowledge

  • Basic knowledge of financial markets and instruments (bonds, swaps, caps, floors, options) in terms of mechanics and elementary pricing.
  • Basic knowledge of fixed income (yield curve, forward rates, forward curve, Libor contracts, discounting factors, interpolation, discounting cash flows).
  • Elementary mathematics and statistics (probability distributions, mean, variance, correlation coefficient, quantiles, regression modelling and analysis, model selection with t-tests).
  • Microsoft Excel.


This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Main Concepts and Risk Drivers

  • Facts and fallacies about yield curve modelling
  • Sensitivity measures; duration measures
  • The determinants of main drivers of MBS risk (prepayment, default, arrears)

P&L hedging

  • Interest rate risk hedging strategies for asset backed portfolios with Libor-swap instruments

Workshop: Designing hedging strategies for a consumer loan portfolio

Understanding Prepayment and Default Risk

  • Traditional models: Arctan, Richard and Roll (Goldman Sachs)
  • Financial engineering models and the OAS approach
  • Econometric models: logistic regression (and why this is wrong!) and survival models for loan data with credit information and their implementation
  • The latest prepayment model (Fabozzi, Kalotay and Yang) to value mortgage pools and agency mortgage-backed securities

Workshop: Implementing Richard and Roll and Fabozzi, Kalotay and Yang in Excel

Value-at-Risk and Expected Shortfall Estimation for MBS

  • Monte Carlo methodology
  • Hull-White two-factor model for interest rates
  • Richard and Roll (GS) model for prepayment
  • Delta-gamma methodology for VaR
  • Expected Shortfall calculations

Day Two

Balance Guaranteed Swaps (BGS)

  • Product description
  • Why BGS is important
  • Pricing with Bermudan swaptions
  • Pricing with floors
  • Pricing with caps
  • Hedging limitations
  • Choosing the bands for hedging
  • What can go wrong

Workshop: Dynamic hedging and risk management of balance guaranteed swaps

Other Types of Structured Swaps

  • Cross-currency balance guaranteed swap
  • Libor-BBR swaps

Reverse Mortgages: The Next RMBS Market?

  • Interest rate risk
  • Real estate risk
  • Mortality risk, mortality tables and calculations
  • Morbidity Risk
  • Prepayment risk
  • Pricing with actuarial methods
  • A Monte Carlo simulation valuation framework

Workshop: Pricing a reverse mortgage with Monte Carlo

Course Revision

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