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Managing the Short‐Term Interest Rate Exposure Inherent in Adjustable Rate Mortgage Loans

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  • Andrea J. Heuson

Abstract

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.

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  • Andrea J. Heuson, 1988. "Managing the Short‐Term Interest Rate Exposure Inherent in Adjustable Rate Mortgage Loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(2), pages 160-172, June.
    • Handle: RePEc:bla:reesec:v:16:y:1988:i:2:p:160-172
    DOI: 10.1111/1540-6229.00452
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