This paper distinguishes between securitization, in which simple pass-throu
gh instruments are created, and structuring, in which mortgages derivative
claims are created. The point is to explain how structuring a transaction b
rings value to a deal's underwriter. Briefly, an underwriter must defeat ar
bitrage between pass-throughs and derivatives. The potential for market seg
mentation and price discrimination by the underwriter is used to analyze th
e structuring process. In the course of the analysis, the legal rules for t
rusts, the algebraic rules for structuring, and the limits on permissible p
rice discrimination are discussed. Results for an actual transaction illust
rate the important features of the analysis. (C) 2000 Elsevier Science S.A.
All rights reserved. JEL classification: G24; G14; G21.