option risk

option risk

All American consumer mortgage loans give the borrower the option to pay the loan off early, usually because of a sale of the property or because the borrower decided to refinance. This is bad news for the investors who purchased that mortgage as part of a pool, because now the income stream they intended to purchase has ended. The investor's risk, that the prepayment option may be exercised and the income stopped, is called the option risk and sometimes the prepayment risk.

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Fitch believes the put option risk could increase in a rising interest rate environment, but views funding risk as manageable given the robust liquidity positon, forecasted positive FCF profile, and favorable capital market access.
The purpose of this article is to analyse the main factors in option risk and sensitivity and to explain the possibilities of their management.
However, most depository institutions have significant exposure to option risk embedded within many classes of financial assets and liabilities, which makes effective duration a more precise method when preparing the re-pricing gap analysis.
Option risk increases as rates rise, and needs to be taken into consideration.
Additionally, equity option traders and risk managers can now analyse and automatically manage their risk exposure using an included option risk management module.
Exotics, Strategies, Greeks and Managing Option Risk in a Trading Book on March 18 is an advanced course that looks at tools for calculating risk positions and composite derivatives strategies.
When trading is limited to a set of discrete times using a finite number of instruments, it is impossible to eliminate the intrinsic option risk. Based on the risk minimization principle, there are two main quadratic approaches for choosing an optimal hedging strategy.
This leaves the company having paid 6.6 percent and receiving something less than 60 basis points net of taxes for the short option risk. The after-tax cost of funding is actually higher than the advertised 6 percent rate.
"A fee is not necessarily the way to go, yet it is an option risk managers should be aware of," remarked Karen Miller, risk manager of LSI Logic Corp.
A premium could be imposed on the implict put option risk transfer feature of government programs.
While OAS has great benefits in and of itself, it is not necessary to calculate a reasonably accurate assessment of the option risk imbedded in a portfolio.
Johnson buys puts and calls to hedge his pipeline but usually buys them as blanket disaster insurance in the event of a significant market move, as opposed to an ongoing strategy to manage his option risk. He knows that he is giving away options to his borrowers in the form of rate locks.