The standard instrument and the nature of the problem an historical perspective
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THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE PowerPoint PPT Presentation


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THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE. ASSET - LIABILITY MIX PROBLEM RATE CEILING CONSTRAINTS USURY CEILINGS DE-REGULATION OF LIABILITIES AND ASSETS ACTIVITY OF OTHER FINANCIAL INTERMEDIARIES AND WALL STREET. ALTERNATIVE MORTGAGE INSTRUMENT DESIGN.

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THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE

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The standard instrument and the nature of the problem an historical perspective

THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE

  • ASSET - LIABILITY MIX PROBLEM

  • RATE CEILING CONSTRAINTS

  • USURY CEILINGS

  • DE-REGULATION OF LIABILITIES AND ASSETS

  • ACTIVITY OF OTHER FINANCIAL INTERMEDIARIES AND WALL STREET


Alternative mortgage instrument design

ALTERNATIVE MORTGAGE INSTRUMENT DESIGN

  • INTEREST RATE RISK

  • INFLATION / DEFLATION


Instrument modification to reduce risks of interest rate uncertainty

INSTRUMENT MODIFICATION TO REDUCE RISKS OF INTEREST RATE UNCERTAINTY

  • PARTICIPATION IN EQUITY

  • SHORTENING OF MATURITIES


Vrms vs gpms

VRMs vs GPMs

  • VRMs

    • VARIABLE PAYMENT / FIXED TERM

    • VARIABLE TERM / FIXED PAYMENT HYBRIDS

    • RESTRICTED VS. UNRESTRICTED

  • GPMs

    • TOTAL BALLOON

    • INTEREST ONLY

    • PARTIAL PRINCIPLE PAYDOWN

    • AMORTIZED LOAN

    • GEM


Design objectives

DESIGN OBJECTIVES

  • TILT PROBLEM OF BORROWER

  • RATE RISK OF LENDER

  • LONG RUN “PAYMENT RISK” BURDEN TO BORROWER

  • SHORT RUN “PROPERTY VALUE RISK” TO LENDER


Problems inherent in design of mortgages

PROBLEMS INHERENT IN DESIGN OF MORTGAGES

  • INDEX CHOICE AND REAL RETURNS

  • SECONDARY MARKETABILITY


Risk management strategies

RISK MANAGEMENT STRATEGIES

  • HEDGING WITH FINANCIALS

    - FUTURES

    - OPTIONS

  • BETTER DURATION MATCHING OF ASSETS AND LIABILITIES

  • NO HOLD STRATEGIES

    - REMICs

  • DIVERSIFICATION OF BUSINESSES

  • RISK SHARING ALTERNATIVES THROUGH INSTRUMENT DESIGN


Risk management strategies1

RISK MANAGEMENT STRATEGIES

SYNTHETIC

ALTERNATIVES

REDUCE RISK

DEFENSIVE STRATEGY

OFFENSIVE STRATEGY


Module development

MODULE DEVELOPMENT

  • TOOLS OF RISK MANAGEMENT

  • PORTFOLIO BALANCE AND RISK-RETURN BALANCE

  • DESIGN OF ALTERNATIVE MORTGAGE INSTRUMENTS

  • HEDGING TECHNIQUES FOR “PIPELINE” ACTIVITIES

  • LIQUIFICATION OF PORTFOLIO

  • LIABILITY MANAGEMENT

  • DIVERSIFICATION OF ASSETS


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