Market risk is a reality in any mortgage banking operation resulting from fluctuations in interest rates. Fluctuations in interest rates impact the market value of the applications in the mortgage bank's locked pipeline and the closed loans in the warehouse. A mortgage bank can mitigate this market risk by applying a hedging strategy. A hedging strategy is generated by applying a complex series of computations and mathematical algorithms. These hedge transactions that are implemented to construct a hedge position are unique in complexity from both financial modeling and accounting perspective.
Implementing and managing a hedging strategy is critical to the financial performance of a mortgage bank and involves an extremely complex set of calculations that is likely not within the skill-set of most lenders. This article is designed to provide an introduction to the value of hedging to your company and how the components of a hedging strategy align to protect a mortgage company's position at risk.
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