Orchid Island Capital(US:ORC)2022-02-25 21:27Interest Rate Risk - As of December 31, 2021, a 200 basis points decrease in interest rates would result in a 2.01% decrease in the portfolio value and a 17.00% decrease in the market value [451]. - A 200 basis points increase in interest rates would lead to a 4.79% decrease in the portfolio value and a 40.64% decrease in the market value as of December 31, 2021 [452]. - The company assesses interest rate risk by estimating the duration of its assets and liabilities, which can vary based on market conditions and assumptions used in third-party models [447]. - The effective duration of the company's PT RMBS portfolio is maintained at less than 2.0, with the stated contractual final maturity of underlying assets generally ranging up to 30 years [443]. - The projected weighted average life and duration of investments are based on assumptions regarding borrower prepayment rates, which can significantly impact results if prepayment rates decrease in a rising interest rate environment [459]. Prepayment Risk - The company faces prepayment risk, as residential borrowers can prepay their mortgage loans at par, affecting the timing of cash flows and potentially altering net interest income [455]. Liquidity and Cash Management - The company had unrestricted cash and cash equivalents of $385.1 million and unpledged securities of approximately $4.7 million as of December 31, 2021, available for margin calls and corporate purposes [457]. - Liquidity risk arises from financing long-term assets with shorter-term borrowings, with potential margin calls increasing if the value of pledged Agency RMBS decreases [458]. Counterparty Credit Risk - The company is exposed to counterparty credit risk related to potential losses from counterparties failing to perform under repurchase agreements and derivative contracts [461]. Hedging Strategies - The company utilizes financial instruments such as futures contracts, interest rate swaps, and swaptions to hedge against interest rate increases, but these strategies may not fully protect against spread risk [441][456].