Mortgage Commitment Model

The mortgage Commitment model is being used to measure the risk of mortgage commitments. The model is actually based on a two-step process, and in the end allows investor to hedge the inherent interest rate risk imbedded in these mortgage commitments

In the first stage, the actual mortgage commitment pipeline is “mapped” to a simplified portfolio of European swaptions. In the second stage, this simplified portfolio of swaptions is used to determine an appropriate portfolio of swaps to hedge the swaptions.