Enter Values

Sell price (e.g., 101.50 or 101-16 = 101.50)
Buy-back price (typically lower than front)
%
MBS annual coupon rate
days
Near-term settlement date
days
Later settlement date
%
Compare roll to repo financing
$
Face/par value of MBS
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Dollar Roll Quick Reference

  • Drop: Front price - Back price
  • Positive drop: Normal; back month trades cheaper
  • Roll advantage: When implied rate < repo rate
  • Foregone: You miss coupon during roll period

Roll Analysis

Financing Advantage +328 bps Strong Roll Advantage Dollar roll offers significantly cheaper financing
Price Drop 0.25 (8/32nds)
Days in Roll 30
Implied Rate 1.97%
Net Drop Value $25,000
Coupon Foregone $41,667
Break-Even Repo 1.97%

Settlement Timeline

Day 15
Front Settlement
+$10,150,000
Sell MBS @ 101.50
30-day roll period
Coupon foregone: $41,667
Day 45
Back Settlement
-$10,125,000
Buy MBS @ 101.25
Net Drop Benefit: $25,000
Implied Financing: 1.97%

Formula Breakdown

Implied Rate = [(Coupon Foregone - Net Drop) / Front Value] x (360 / Days)

Roll vs Repo Comparison

Metric Dollar Roll Repo Alternative
Financing Rate 1.97% 5.25%
Financing Cost $16,667 $44,406
Net P&L vs Repo Save $27,740

Understanding Dollar Rolls

What is a Dollar Roll?

A dollar roll is a repo-like financing transaction used exclusively for mortgage-backed securities. You sell MBS for near-term (front month) settlement and simultaneously agree to buy back substantially similar securities for later (back month) settlement. Unlike classic repo, the securities returned need not be identical - just from the same issuer with the same coupon.

Implied Financing Rate
Implied Rate = [(Coupon Foregone - Net Drop) / Front Price Value] x (360 / Days)

The Drop

The drop is the price difference between front and back month settlement prices. In a normal yield curve environment, back month prices are lower (positive drop). This drop represents compensation for the coupon and principal payments you forfeit during the roll period.

Key Difference from Repo: In a dollar roll, you forfeit coupon interest and any principal prepayments during the roll period. The dealer keeps these cash flows, making the drop essential to compensate you.

Roll Specialness

Roll is Attractive

When implied financing rate is below repo rates. The MBS is trading "special" - strong demand creates favorable roll pricing.

Repo is Better

When implied financing rate is above repo rates. Consider financing via repo instead of rolling.

Dollar Roll Risks

  • Prepayment Risk: You miss any principal prepayments during the roll
  • Pool Risk: The returned MBS may have different characteristics
  • Delivery Variance: Under/over-delivery tolerances can affect economics
  • Coupon Foregone: Must accurately estimate lost interest income
TBA Market: Most dollar rolls occur in the To-Be-Announced (TBA) market for agency MBS. BMA/SIFMA publishes standard settlement dates.
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Frequently Asked Questions

A dollar roll is a repo-like financing transaction specific to agency MBS. You sell mortgage-backed securities for near-term settlement and simultaneously agree to buy back substantially similar securities for later settlement. Unlike repo, you forfeit coupon payments during the roll period.

The drop is the price difference between the front month (sell) and back month (buy) settlement prices. In a normal yield curve environment, the back month price is lower, creating a positive drop that represents part of your financing cost offset.

The implied financing rate = (Net Drop Value / Front Price Value) x (360 / Days in Roll). This annualizes the cost of the roll to compare against repo rates. A lower implied rate than repo means the roll is more attractive.

Dollar rolls can offer cheaper financing when the implied rate is below repo rates. This occurs when MBS are trading special - meaning there is strong demand for the securities. However, you must consider that you forfeit coupon and principal payments during the roll.

Key risks include: prepayment risk (you miss prepayments during the roll), receiving a different pool on the back leg, under/over-delivery tolerances, and the need to accurately estimate foregone coupon. The returned security may have different prepayment characteristics.
Disclaimer

This calculator is for educational purposes only. Actual dollar roll economics depend on specific pool characteristics, prepayment assumptions, and market conditions. Consult your trading desk for execution decisions.

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