Mortgage Backed Securities:
The Assessment and Management of Risk

Course Outline

This course will enable you to understand the major causes of risk in mortgage backed securities markets and develop appropriate solutions for managing those types of risk. The programme includes prepayment, default and arrears risk and during the course you will apply a wide range of models and techniques to these areas. Also covered are modern instruments such as balance guaranteed swaps, equity release mortgages and property derivatives. Pricing examples are given, but the focus of the programme is on managing risk, hedging and scenario analysis.

Who the Course is for

• Risk Managers
• Middle Office and Senior Managers
• Investors
• Quantitative Analysts, Financial Engineers and System Developers
• Structured Product Desks, Product Controllers and Researchers
• Loan Portfolio Managers and Fund Managers

• Credit Analysts and Credit Risk Managers

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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

Review of the Fundamental Tools and Concepts

• Basic Products
• Yield Curve
• The main drivers of MBS risk:
• Prepayment
• Default
• Arrears

P&L hedging

• Basic techniques
• Hedging strategies for consumer loan portfolios

Workshop: Designing hedging strategies for a consumer loan portfolio

Understanding Prepayment and Default Risk

• Traditional models: Arctan, Richard and Roll
• How to implement a Richard and Roll model
• Financial engineering models
• Econometric models
• Loan by loan models and their implementation
• OAS approach
• Synthetic credit protection ABS CDS and ABX.HE
• The securitisation process for RMBS

Workshop: Implementing R&R and a loan by loan model

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
• Cross-currency balance guaranteed swap

Reverse Mortgages: The Next RMBS Market?

• Interest rate risk
• House price index
• Mortality tables
• Poisson models for Monte Carlo simulation
• Simulating payment times and events

Workshop: Pricing a BGS.
Simulating reverse mortgage payment times and events.

Property derivatives

• Using new instruments for hedging RMBS
• Indices
• Forward contracts on indices
• Pricing the forward contract on HPI
• Total return swap
• Hedging RMBS with property derivatives
• Macro cross-hedging

Workshop: Pricing the forward contract on HPI and hedging RMBS with property derivatives.