Dollar Roll

AAA

DEFINITION of 'Dollar Roll'

A type of repurchase transaction in the mortgage pass-through securities market in which the buy side trade counterparty of a "to be announced" (TBA) trade agrees to a sell off the same TBA trade in the current month and to a buy back the same trade in a future month at a lower price.


In a dollar roll, the buy side trade counterparty gets to invest the funds that otherwise would have been required to settle the buy trade in the current month until the agreed upon future buy-back. The sell side trade counterparty benefits by not having to deliver the pass-through securities (which they might otherwise have shorted or committed to another trade) in the current month.


INVESTOPEDIA EXPLAINS 'Dollar Roll'

The price difference between months is known as the drop. When the drop becomes very large, the dollar roll is said to be "on special". This might happen for several reasons, including large collateralized mortgage obligation deals that increase the demand for mortgage pass-through securities, or unexpected fallout of mortgage closings in a mortgage originator's pipeline. In both cases, financial institutions might have more sell trades in the current month than they are able to deliver securities into, forcing them to "roll" those trades into a future month. The greater the shortage of available securities in the current month, the larger the drop becomes.

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities. ...
  3. To Be Announced - TBA

    A term used to describe a forward mortgage-backed securities ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Reverse Repurchase Agreement

    The purchase of securities with the agreement to sell them at ...
  6. Pass-Through Security

    A pool of fixed-income securities backed by a package of assets. ...
Related Articles
  1. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  2. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  3. Investing

    What’s The Essence Of Smart Beta In Fixed Income?

    In essence, smart beta strategies seek to re-write index rules to capture factors, such as value, quality, or low volatility, in their stock portfolios.
  4. Investing

    Is It Possible To Trade Bitcoin Options?

    Options trading in bitcoins is a good way to insure or hedge one's risks or earn profits from volatility and speculation, but there still are risks.
  5. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your Portfolio?

    Should junk bonds be a part of your portfolio? Here's what you need to know.
  6. Professionals

    Vanguard Readies Muni Bond ETF

    Vanguard is set to roll out a muni bond ETF, the firm's first.
  7. Mutual Funds & ETFs

    Is the TLT ETF a Good Bet for the Long Run?

    Is the iShares 20+ Year Treasury Bond ETF (TLT) a good bet for the long run?
  8. Bonds & Fixed Income

    African Equities vs. Bonds: Risks and Rewards

    A look at the risks and rewards of exposure to African equities vs. bonds.
  9. Bonds & Fixed Income

    How Rate Hikes Will Affect Your Investments?

    An interest rate hike by the Fed, which will happen either during their June or September meeting, could impact your fixed income investments.
  10. Professionals

    Is Now the Time for Junk Bonds?

    A bet on high-yield bonds is a bet that the global economy will continue to improve...but not too much.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center