A mark-to-model approach to the valuation of Residential Mortgage Backed Securities

Marco Folpmers () and Peter de Rijke
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Marco Folpmers: Capgemini

Journal of Asset Management, 2010, vol. 11, issue 1, No 5, 55-61

Abstract: Abstract In this article we demonstrate the fair value determination of a Residential Mortgage Backed Security (RMBS). First, International Financial Reporting Standards rules regarding (level 3) income-based fair value are described. Subsequently, we determine this income-based fair value for an example RMBS. Special attention is paid to the modelling of the decision to call the security. This embedded option is exercised by the issuer starting from a pre-determined date if the loan can be refinanced more efficiently elsewhere.

Keywords: FAS 157; fair value; level 3 valuation; Residential Mortgage Backed Security; Monte Carlo simulation of stochastic cash flows; call option of a security (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/jam.2009.26

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