Goldman, Sachs & Co. Mortgages Fixed Income Research

goldman , Sachs & Co. Mortgages Fixed Income Research valuation and hedging of Inverse IOs As leverage is defined as the ratio of borrowed funds to equity, in the case of the inverse IO this ratio will In a recent mortgage Market Comment article be given by the price of floater (the amount syntheti- ( How To Value and Hedge Inverse Floaters, No- cally borrowed) divided by the price of the inverse vember 19, 1999), we examined in some detail the IO (the amount of equity), as the notional amounts characteristics of inverse floaters, with a particular are the same in the two cases. Therefore, the effec- emphasis on the close similarity between inverses tive multiplier (or leverage) can be written: and repo transactions. In this article, we extend the same analysis to inverse IOs.

Goldman, Sachs & Co. Mortgages Fixed Income Research 8 December 3, 1999 Valuation and Hedging of Inverse IOs In a recent Mortgage Market Comment article

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