Canada Housing Trust Swap Valuation

The Canada Housing Trust (CHT) Swap is a contract to exchange the interest portion of cash flows from a pass-through Mortgage-Backed Security (MBS) for coupon payments made by a Canadian Mortgage Bond (CMB). The valuation of this swap is complicated by the fact the MBS has a coupon payment that depends on a principal balance that is affected by both scheduled and unscheduled principal payments. It is therefore very important to correctly specify and account for the prepayment behavior of the mortgage pools.