A model is presented for the calculation of the fair value and the hedge ratios, Delta, Vega and Gamma, with respect to pools of Canadian commercial and residential mortgages. Commercial mortgages are closed and either insured or not insured, while residential mortgages are separated into • insured open or closed mortgages, and • non-insured open or closed mortgages.

CHT sold bullet bonds of total notional N that pays C% semi annual coupon for 60 months to investors for P dollars. Using these proceedings, CHT bought a mortgage pool, whose dollar price was P, from the party and entered into a “seller swap” with the party. CHT will buy new mortgage pools from the principal payments generated from the mortgage pools that already bought from the party

With respect to a closed commercial mortgage certificate, the transfer coupon rate is defined as an annualized, monthly compounded interest rate, such that the fair value of the closed mortgage certificate, from Treasury’s point of view, is par. The model calculates the transfer coupon rate for forward starting, closed Canadian commercial mortgage certificates.

We model the closed monthly cash flows from a pool of mortgage. Here cash flows consist of principal and interest payments. Principal payments arise from the regular amortization of principal, as well as from scheduled and unscheduled principal pre-payments.