What is a 'Dollar Roll'

A dollar roll is 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.

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.

BREAKING DOWN 'Dollar Roll'

The dollar roll transaction is conducted in a market that has the same product and the same coupon rate but with different contract date, hence the term roll. The most common and most liquid contract dates are one-month and three-month rolls. 

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.

Rolls can be purchased by a new transaction where the originator wishes to push their hedge out to a further date. For example, if an investor sells an outright contract and wishes to push it out one month, they would then have to "buy and sell" in the one-month roll market. 

Because there is no increase or decrease in the outright position, dollar rolls carry no, or very little, duration risk. It is simply an extension of a contract, not a new contract. 

RELATED TERMS
  1. Drop

    A drop is the price difference between when an investor sells ...
  2. Roll In

    To roll in a cost to a mortgage means adding that cost to the ...
  3. Rolling Returns

    Rolling returns are annualized average returns for a period, ...
  4. Rolling Option

    A rolling option is a contract that offers a buyer the right ...
  5. To Be Announced - TBA

    To be announced is a phrase used to describe a forward-settling ...
  6. Switch

    A switch is a futures trading strategy involving closing a near ...
Related Articles
  1. Retirement

    The Smartest Ways to Roll Over Your 401(k)

    Because 401ks come in many shapes and sizes, it's important to seek financial advice to evaluate major decisions—especially if your account is large.
  2. Investing

    Is USO a Good Way to Invest in Oil?

    The United States Oil Fund is better suited to short-term investors who actively manage their portfolios.
  3. Retirement

    Tips For Moving Retirement Plan Assets

    Moving assets is common when changing jobs or retiring, but you have to take this action carefully to avoid penalties.
  4. Investing

    UNG: US Natural Gas ETF Performance Case Study

    Explore the performance of the United States Natural Gas Fund since 2012, including the influence of contango and backwardation on the fund's returns.
  5. Investing

    ETFs Provide Easy Access To Energy Commodities

    Investment returns on commodities ETFs are not usually influenced by the overall direction of the stock market the way that other ETFs are.
  6. Personal Finance

    Shopping for a Mortgage in 2017? Use This Tool First

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2017 can all be done online.
  7. IPF - Mortgage

    Finding the Best Mortgage Rates

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how.
  8. IPF - Mortgage

    Forecasting Mortgage Rates: Buy, Sell or Refi?

    If you're paying off a mortgage or plan to buy a home, chances are you pay attention to where mortgage rates are heading. Consider these scenarios.
  9. Personal Finance

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
RELATED FAQS
  1. I want to roll over a portion of my retirement plan with my employer and I have been ...

    This is based on the rules that an individual can roll over a portion of his or her retirement plan balance, rather than ... Read Answer >>
Trading Center