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Managing the Short‐Term Interest Rate Exposure Inherent in Adjustable Rate Mortgage Loans
Author(s) -
Heuson Andrea J.
Publication year - 1988
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00452
Subject(s) - interest rate , floating interest rate , economics , term (time) , portfolio , interest rate risk , carry (investment) , index (typography) , econometrics , monetary economics , financial economics , macroeconomics , computer science , physics , quantum mechanics , world wide web
This paper develops a model for determining the level of, and changes over time in, the short‐term interest rate exposure contained in adjustable rate mortgage loans (ARMs). Results of the study indicate that movements in the underlying adjustment index can create both upward‐movement or downward‐movement interest rate risk for lenders whose ARMs carry rate adjustment limits. The model presented here is useful for designing hedging strategies for ARM loans, and for analyzing the impact of new originations on the interest rate exposure of the ARM portfolio.