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Username: ForexGuy

Rating:
Guru Stars

Asked to: Dara Madee

Date Created: 04 Apr 2016
Category 17
Tag Financial
Question What is 'Drop'?
Advice from Guru
Hello Forex Guy,

The difference in price between the front month and back month in a mortgage-backed security (MBS) dollar roll trade. A dollar roll is a popular type of trade in the MBS pass-through TBA market.

According to forward securities pricing theory, the front month price should be higher than the back month price. The drop is a function of current short-term interest rates, prepayment estimates, and the supply and demand for pass-throughs in the current delivery or front month.

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