DEFINITION of 'Drop'
The difference in price between the front month and back month in a mortgage-backed security (MBS) dollar roll trade. A dollar roll is a popular type of trade in the MBS pass-through TBA market.
According to forward securities pricing theory, the front month price should be higher than the back month price. The drop is a function of current short-term interest rates, prepayment estimates, and the supply and demand for pass-throughs in the current delivery or front month.
INVESTOPEDIA EXPLAINS 'Drop'
A pass-through TBA security is said to be trading through fail when the drop is larger than what it would cost a mortgage originator, investor or securities dealer to fail to deliver into a TBA contract for an entire month. When there is a shortage of supply or extreme demand for a TBA security in the current delivery month, the drop can increase to fail or larger, reflecting the fact that securities dealers would rather roll a trade out an additional month at a large drop or fail to deliver that security for an entire month than make delivery in the current month.
The predetermined delivery price for an underlying commodity, ...
A type of asset-backed security that is secured by a mortgage ...
A term used to describe a forward mortgage-backed securities ...
A pool of fixed-income securities backed by a package of assets. ...
A type of repurchase transaction in the mortgage pass-through ...
A temporary postponement of mortgage payments.