Post by Sapphire Capital on Dec 9, 2008 22:18:53 GMT 4
Residential Mortgage Credit Derivatives
Jefferson Duarte
University of Washington
Douglas A. McManus
Office of the Chief Economist - Freddie Mac
October, 07 2008
Abstract:
As the fallout from subprime losses clearly demonstrates, the credit risk in residential mortgages is large and economically significant. To manage this risk, this paper proposes the creation of derivative instruments based on the credit losses of a reference mortgage pool. We argue that these derivatives would enable banks to retain whole loans while also enjoying the capital benefits of hedging the credit risk in their mortgage portfolios. In comparisons of hedging effectiveness, we show that instruments based on credit losses outperform contracts based on house-price appreciation.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1280404_code328279.pdf?abstractid=1280404&mirid=5
Jefferson Duarte
University of Washington
Douglas A. McManus
Office of the Chief Economist - Freddie Mac
October, 07 2008
Abstract:
As the fallout from subprime losses clearly demonstrates, the credit risk in residential mortgages is large and economically significant. To manage this risk, this paper proposes the creation of derivative instruments based on the credit losses of a reference mortgage pool. We argue that these derivatives would enable banks to retain whole loans while also enjoying the capital benefits of hedging the credit risk in their mortgage portfolios. In comparisons of hedging effectiveness, we show that instruments based on credit losses outperform contracts based on house-price appreciation.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1280404_code328279.pdf?abstractid=1280404&mirid=5