[30pts total] Dollar Rolls. Should there be any missing input data/information use (and

justify) any reasonable assumption.

(a) [20] Create a dollar roll matrix of breakeven rates for an agency MBS with gross and deal coupons of 8.035% and 7.5%, respectively, and settlement dates 6/14/16 and 9/15/16. Assume standard fully amortizing fixed rate mortgages with a term of 30:0, a WAM of 29:5 and an immediate price of 96-16. MBS CFs are due the owner of record on the first of each month, but are paid on the 25 th of that month.

You MUST show the analysis for a PSA of 150, a forward drop of 35/32, and a reinvestment rate of 2% (act/360).

Calculate breakeven rates for PSAs of 120, 150, and 180, and forward drops of -40, -35, and -30 (32s).

(b) [5] Discuss the risks of roll vs. hold from the perspective of the investor.

(c) [5] Why does the dollar roll market exist?