 |
 |
Table 2 details the OAS-based results calculated using the Andrew Davidson & Co., Inc. prepayment model. The results compare price, OAS, effective duration and convexity of the hybrids using the ballooned pay-off and the alternate assumption, whereby hybrid cash flows run out to maturity. The market rates, volatilities and price quotes used in the comparison were as of the close on 11/20/2003.
Table 2: Tail's Value Added
|
ARM Type
|
Price Balloon
|
Price Maturity*
|
Chg
|
OAS Bal
|
OAS MAt**
|
Chg
|
Dur Bal
|
Dur Mat
|
Chg
|
Cvx Bal
|
CVx Mat
|
Chg
|
|
3/1 YR
|
101.38
|
101.15
|
(0.23)
|
104
|
95
|
(8)
|
1.99
|
2.31
|
0.31
|
-0.21
|
-0.33
|
(0.13)
|
|
5/6 MO
|
101.00
|
101.23
|
0.23
|
65
|
74
|
9
|
2.14
|
2.17
|
0.03
|
-0.70
|
-0.76
|
(0.06)
|
|
5/1 YR
|
100.03
|
99.93
|
(0.10)
|
74
|
70
|
(4)
|
2.39
|
2.61
|
0.21
|
-0.26
|
-0.36
|
(0.10)
|
|
5/1 YR
|
102.56
|
102.83
|
0.26
|
55
|
64
|
9
|
1.95
|
1.98
|
0.03
|
-1.02
|
-1.10
|
(0.08)
|
|
5/1 YR
|
102.06
|
102.43
|
0.37
|
66
|
78
|
12
|
2.20
|
2.24
|
0.05
|
-0.84
|
-0.94
|
(0.10)
|
|
5/1 YR
|
102.25
|
102.39
|
0.14
|
63
|
70
|
6
|
1.36
|
1.46
|
0.10
|
-0.58
|
-0.69
|
(0.11)
|
|
5/1 YR
|
101.31
|
101.31
|
(0.00)
|
65
|
65
|
(0)
|
2.15
|
2.28
|
0.13
|
-0.64
|
-0.73
|
(0.09)
|
|
7/1 YR
|
100.75
|
100.95
|
0.20
|
33
|
38
|
5
|
3.18
|
3.26
|
0.08
|
-0.69
|
-0.79
|
(0.10)
|
| *Same-OAS valuation **Same-Price valuation | ||||||||||||
The OAS ranges from 38 to 95 for the ARMs analyzed, while the effective duration ranges from 1.46 to 3.28 when the balloon prepayment assumption is relaxed. The analysis shows that the 3/1 hybrid ARM offers the highest OAS whereas the 7/1 hybrid ARM is traded more inline with fixed-rate agency MBS.
The price differences in the table reflect the amount by which the
tail contributes to the value of the hybrid. We see that the tail value
changes the ARM price by marginal amounts within the range of -0.23
to +0.37 points in the current environment. Similar changes in OAS indicate
the annual earnings differences attributable to the tail range between
-8 to +12 basis points in the current environment. Not surprisingly,
the effective duration and negative convexity of the hybrids extend
modestly when cash flows extend to maturity and are not truncated by
the balloon payment.
It is not hard to figure the dark forces that cause sub-par tail values with few ARMs in the analysis: the reset caps. Table 3 decomposes the change in the ARM price attributable to the caps and floors >>>
