Mortgage Bank Hedging Techniques

This paper presents a brief overview of mortgage banking and mortgage-backed securities, with special attention given to the unique characteristics of the\u27se financial instruments. The risk leading to the need for hedging mortgage-backed securities, as well as some of the more important concepts and terms associated with hedging are discussed. Alternatives are presented considering hedging with financial futures contracts, forward contracts and options. The advantages and disadvantages of each alternative are given with respect to hedging mortgage- backed securities portfolios and mortgage pipelines. Hedging strategies are hedged according to standards such as cost, complexity and effectiveness. This paper concludes that hedging with forward contracts and options may be more appropriate for risk-averse institutions than hedging with futures