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SFAcademy: Level 2
Module 8 Now Available
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Module 8 of SFAcademy's Level 2 Bootcamp Series is now live.
In the third and final installment of Agency RMBS Modeling, Risk & Derivatives, Bank of America's Chun Lin explains how cash-flow engineering redistributes mortgage prepayment risk across CMO structures, including CMO passthroughs, floaters, sequentials, PACs, Z-bonds, IOs, and IIOS.
- CMO creation is an optimization exercise that reallocates principal and interest cash flows to create distinct risk profiles for different investor mandates.
- As cash flows are reallocated across time and coupon structures, different CMO tranches retain varying degrees of duration and convexity risk.
- The stability created through this process is conditional and can break down abruptly when a structure reaches its boundaries.
