An asset-based complex risk management strategy that is usually implemented by some savings institutions (thrifts, savings and loan institutions (S&Ls)). It involves a self-funding, self-hedged series of transactions that generally utilize mortgages securities. Broadly speaking, this strategy is carried out by simultaneously adding assets and liabilities to the balance sheet while managing the resulting interest rate risk using a number of hedging instruments. More specifically, the savings institution buys mortgages financed with short-term borrowings, swaps the mortgage cash flows, and resort to collars to reduce various components of interest rate and prepayment risk.
This highly leveraged strategy utilizes reverse repo transactions, with the collateral to borrow short-term funds being usually mortgage-backed securities.
