Hedging individual mortgage risk

Authors

  • Terry L. Zivney Ball State University, Muncie, IN 47306, USA
  • Carl F. Luft DePaul University, 1 East Jackson, Chicago, IL 60604, USA

DOI:

https://doi.org/10.1016/S1057-0810(99)00037-2

Keywords:

Housing economics, Futures, Hedging, Mortgage

Abstract

This paper investigates the feasibility of an individual hedging the interest rate risk involved in planning to take out a mortgage at a future point in time. Simulation using market data indicates that a simple futures hedge reduces the variation in mortgage capacity by about one half. Expected mortgage capacity is very close to 100% of the original capacity at a very low cost. Hedging the individual mortgage with a put futures option is less effective in reducing downside risk and has a higher expected cost. © 1999 Elsevier Science Inc. All rights reserved.

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Published

1999-06-30

How to Cite

Zivney, T. L., & Luft, C. F. (1999). Hedging individual mortgage risk. Financial Services Review, 8(2), 101–115. https://doi.org/10.1016/S1057-0810(99)00037-2

Issue

Vol. 8 No. 2 (1999): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1999 JAI Press Inc.

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