Assignment of Trade (AOT)

  

In general, the term "assignment of trade" refers to a process where someone in a forward contract (meaning a deal that is set to take place at some point in a future) makes a separate side deal with to assign their part of the agreement to a third party. Remember the game of telephone as a kid? You know, the one where you whisper something to the person next to you and they repeat what they heard to the person next to them and on down the line until "I like your shoes" becomes "Eye lines in York are a snooze."
Assignment of trade is basically the transactional equivalent of telephone (only hopefully nothing gets degraded along the way - you're just passing the deal along to the next person).
The term has its most notable relevance in the market for mortgage-backed securities. An MBS is a tradable asset similar to bonds that derive their income from revenue from home loans. Some mortgage-backed securities are traded on what is called the "to be announced," or TBA, market. This sounds like something a bad business school student would make up after forgetting to do their homework, but it's a real thing in the MBS world.
Individual mortgages differ in a lot of ways. The size or quality of the home, the location, the credit histories of the people who own the house, etc. In the TBA market, companies take pains to make sure the mortgages are as similar as possible, to the extent that they are virtually interchangeable.
Because of this, the exact nature of a particular mortgage becomes irrelevant - any particular mortgage within a certain type is as good as another. Thus, companies trade in the market without having to know specifics of the mortgage pool they are trading - the details are literally TBA.
In this context, companies are able to move pretty fast and can use the assignment of trade technique. By making a deal and immediately assigning the assets to a third party, a company seeks to fine-tune the timing of the transaction. This way, the firm can maximize its return while minimizing its risk. When using this strategy, the company at the center of the trade doesn't want to hold the MBS for any length of time. Instead, it creates a situation where it moves the securities onto a third party, lowering its risk and optimizing its return.

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Finance: What is Loan To Value (LTV)?3 Views

00:00

Finance allah shmoop What is the loan to value ratio

00:06

or ltv All right Well this is the value of

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your house for hundred grand This is your down payment

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one hundred grand And this is your loan of three

00:20

hundred grand loan to value Yeah It's a fraction easy

00:25

Three hundred grand over four hundred grand or three over

00:28

four or seventy five percent Well what does that mean

00:31

Like why do we even care about loan to value

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ratio Well because they speak volumes as to how risky

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the loan is to the bank or whoever is lending

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the dough in this transaction Should you know things go

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awry like you get hit by bus and you can't

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pay it back How does a bank it's loan back

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So you want a low loan to value ratio if

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you're the lender because well the worst thing that happens

00:56

is that you repossess whatever the asset was that was

00:59

pledged as collateral against a loan You just sell it

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to somebody else So what are the odds You could

01:03

get your money back if you're the bank who loan

01:06

three hundred grand against a home that just sold for

01:08

four hundred grand Could you drop the price tow three

01:11

eighty and then pay twenty thousand dollars in realtor costs

01:14

and all the stuff that goes with it And then

01:16

you're down to three sixty and maybe there's some other

01:18

costs and their ten grand or so you get all

01:21

your three hundred thousand dollars loan back and probably fifty

01:24

grand to boot and in theory that might go to

01:26

the cellar but it probably all go to the banks

01:28

lawyers So this equation works great with homes because over

01:31

time holmes generally go up in value knock down because

01:35

there's more people coming onto the earth again and again

01:38

just checked global warming if you're curious about that So

01:40

holmes worked great for mortgages and generally accrue lower loan

01:45

to value ratios over time But how does this work

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when you take out a car loan Yeah cars are

01:52

essentially never an investment They're just a money pit They

01:55

just go down in value So you really wanted that

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forty two two thousand dollars convertible prius with the turbo

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charging battery which gave it a zero to sixty rating

02:05

of seven point eight seconds rather than the standard prius

02:09

Rating zero to sixty of just yes problem You put

02:13

ten thousand down and borrowed thirty two grand on what

02:15

you hoped would be a five year loan Unfortunately six

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months after you drove off the lot the market value

02:21

of your turbo prius is only something like thirty thousand

02:25

dollars maybe less And in that time period you've only

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paid four thousand dollars of principal down on your loan

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So you still owe twenty eight thousand bucks on an

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asset that today would sell form them maybe thirty and

02:38

after commissions transaction costs and lawyer hassle Well it'd certainly

02:42

be worth less than that much money toe whoever had

02:45

to repossess the car and then sell it that's why

02:48

they charge you so much interest rate on car loans

02:51

and only can't blame him Cars suffer this very difficult

02:54

loan to value equation all the time and it's part

02:57

of the reason that car loans air made so difficult

03:00

especially when you go through a dealer and why they

03:03

push you hard to put down a whole lot of

03:05

money up front So the big idea here hi l

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tvs are bad low lt v's are good lenin doubt 00:03:11.5 --> [endTime] Go turbo

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