MIAC offers risk measurement valuation and hedge solutions to reduce the impact MSRs may have on your P&L. MIAC’s proprietary variable assumption set tool, (VAST™), is a platform to generate broad varieties of scenario analysis and stress tests.  From the market risks, environment shocks and scenario returns the resultant MSR values may be determined and evaluated relative to a myriad of hedging instruments.

Identifying the Risk

What Risks to Hedge?

  • Duration  and  Partial Duration (Yield Curve) Risk
    • IO and MSR  are assets with negative duration
  • Convexity Risk
    • Negative Convexity: price decline in rally  is much larger than the increase in an interest rate back up
  • Mortgage-spread sensitivity
    • Movements of mortgage rates vs swap rates
  • Vega/Volatility Risk
  • Model Risk
  • Enterprise Risk

MSR Hedging Objective – Risk Minimization

Risk Minimization

 

Hedging Process Framework

  1. Performance Review
  2. Policy Formation
  3. Qualitative and Quantitative Risk Assessment
  4. Optimization
  5. Strategy Formulation
  6. Strategy Implementation
  7. Monitor and Attribute Results

 Accounting

SFAS 156 allows you to mark to market MSR assets and hedges.

The following risks will move your P&L:

  1. Convexity risk – managed with the dynamic hedging
  2. Basis risk – movements of mortgage rates vs. swap rates
  3. Volatility risk – small or non-existent

Related volatility risks will be smaller than the non-hedged volatility.