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Dollar Rolls

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mmmoneyA source of liquidity and current opportunities for incremental income

By Robert Perry, Director, Advisory Services

Dollar rolls offer a fairly easy way to add short-term liquidity to a credit union’s balance sheet without relying solely on federal funds lines or other open lines of credit, which may or may not be available.

By definition, a dollar roll is similar to a reverse-repurchase agreement – a simultaneous agreement to sell a security held in a portfolio and purchase a similar security at a future date at an agreed-upon price. Dollar roll transactions are executed with mortgage pass-through securities, and many institutions are able to account for this as a financing transaction instead of the sale and purchase of a security.

While a dollar roll transaction may provide quick liquidity, many factors contribute to the potential economic value (profit or loss) of the transaction:

  • whether projected prepayments reflect actual prepayments
  • the reinvestment rate
  • the transacted (negotiated) sale price
  • the subsequent purchase price

The following is an example of a dollar roll. On July 17, a dealer and XYZ Credit Union enter into a one-month dollar roll agreement. The dealer agrees to purchase $1 million of FNMA 2.5s at 100 and 25/32 on July 17, and XYZ Credit Union agrees to repurchase $1 million of face value FNMA 2.5s at 100 and 15/32 on August 18. The difference between the immediate price and the forward price is called the “drop,” which would be 10/32 or 0.3125 (100 25/32 minus 100 15/32). 

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