28:
298:
This difference in convexity can also be used to explain the price differential from an MBS to a
Treasury bond. However, the OAS figure is usually preferred. The discussion of the "negative convexity" and "option cost" of a bond is essentially a discussion of a single MBS feature (rate-dependent cash
117:. More loosely, the OAS of a security can be interpreted as its "expected outperformance" versus the benchmarks, if the cash flows and the yield curve behave consistently with the valuation model.
279:(second derivative of price over yield), meaning that the price has more downside than upside as interest rates vary. The MBS-holder's exposure to borrower prepayment has several names:
264:
borrowers will tend to exercise this right when it is favourable for them and unfavourable for the bond-holder, buying an MBS implicitly involves selling an option. (The presence of
268:
can create further optionality.) The embedded "option cost" can be quantified by subtracting the OAS from the Z-spread (which ignores optionality and volatility).
836:
43:
824:
830:
194:
17:
437:
390:
260:
relates primarily to the right of property owners, whose mortgages back the security, to prepay the mortgage amount. Since
760:
47:
39:
755:
364:
345:
136:
than noncallable debt, and their values are more fairly compared by OAS than by yield. OAS is usually measured in
868:
750:
626:
159:
or Z-spread), the OAS quantifies the yield premium using a probabilistic model that incorporates two types of
566:
143:
For a security whose cash flows are independent of future interest rates, OAS is essentially the same as
155:
In contrast to simpler "yield-curve spread" measurements of bond premium using a fixed cash-flow model (
606:
51:
863:
430:
765:
110:
102:
265:
240:
Treasury bonds (or alternate benchmarks, such as the noncallable bonds of some other borrower, or
858:
197:
techniques are generally used to simulate hundreds of yield-curve scenarios for the calculation.
31:
601:
35:
745:
709:
546:
505:
236:
that equates the market price of the MBS to its expected value in this theoretical framework.
59:
423:
408:
186:
160:
244:) are generally not available with maturities exactly matching MBS cash flow payments, so
8:
515:
591:
241:
181:
Designing such models in the first place is complicated because prepayment rates are a
174:
125:
86:
63:
193:
interest rate. (They tend to go up as interest rates come down.) Specially calibrated
798:
724:
576:
498:
386:
360:
341:
323:
308:
292:
217:
788:
659:
631:
571:
556:
220:) across the range of all possible rate scenarios when discounting each scenario's
114:
55:
803:
793:
596:
586:
581:
510:
133:
98:
704:
689:
654:
641:
616:
520:
488:
457:
276:
213:
190:
182:
106:
94:
852:
808:
783:
694:
679:
669:
621:
561:
551:
272:
261:
245:
168:
121:
719:
664:
611:
541:
467:
74:
27:
775:
714:
674:
649:
525:
493:
483:
446:
338:
Salomon Smith Barney Guide to
Mortgage-Backed and Asset-Backed Securities
275:
fall and vice versa, the basic (pass-through) MBS typically has negative
137:
129:
82:
78:
401:
34:
are widely applied in mathematical finance; here used in calculating an
462:
729:
684:
318:
313:
156:
144:
124:, the embedded option relates primarily to the borrower's right to
201:
101:. OAS is hence model-dependent. This concept can be applied to a
415:
90:
399:
402:"Risk Metric Definitions: Option-Adjusted Spread (OAS)"
837:
Securities
Industry and Financial Markets Association
132:
the debt. These securities must therefore pay higher
204:. The definition here is based on Lakhbir Hayre's
200:OAS is an emerging term with fluid use across MBS
850:
383:Introduction to Option-Adjusted Spread Analysis
208:textbook. Other definitions are rough analogs:
128:, a right commonly exercised via the borrower
431:
224:with the Treasury yield curve plus a spread,
248:are necessary to make the OAS calculation.
825:Commercial Mortgage Securities Association
438:
424:
831:International Capital Market Association
26:
14:
851:
380:
357:Options, Futures and Other Derivatives
419:
335:
230:. The OAS is defined as the value of
77:which has to be added to a benchmark
46:. These are used for settings beyond
354:
271:Since prepayments typically rise as
109:with embedded options, or any other
54:, even in those settings, banks use
761:Commercial mortgage-backed security
400:Risk Management Task Force (2004).
299:flows) measured in different ways.
38:. Other common pricing-methods are
24:
756:Collateralized mortgage obligation
374:
25:
880:
256:For an MBS, the word "option" in
89:'s payments to match its market
445:
751:Collateralized debt obligation
627:Reverse convertible securities
13:
1:
329:
150:
251:
120:In the context of an MBS or
7:
567:Contingent convertible bond
302:
10:
885:
607:Inverse floating rate note
206:Mortgage-Backed Securities
93:, using a dynamic pricing
62:models to incorporate the
817:
774:
738:
640:
534:
476:
453:
766:Mortgage-backed security
535:Types of bonds by payout
477:Types of bonds by issuer
111:interest rate derivative
103:mortgage-backed security
336:Hayre, Lakhbir (2001).
700:Option-adjusted spread
602:Inflation-indexed bond
355:Hull, John C. (2006).
258:option-adjusted spread
71:Option-adjusted spread
67:
18:Option adjusted spread
869:Fixed income analysis
746:Asset-backed security
710:Weighted-average life
547:Auction rate security
60:stochastic volatility
30:
739:Securitized products
409:Society of Actuaries
381:Miller, Tom (2007).
516:Infrastructure bond
385:. Bloomberg Press.
242:interest rate swaps
177:rates (for an MBS).
50:by Black-Scholes.
592:Floating rate note
266:interest-rate caps
105:(MBS), or another
97:that accounts for
68:
64:volatility surface
846:
845:
799:Exchangeable bond
725:Yield to maturity
577:Exchangeable bond
499:Subordinated debt
392:978-1-57660-241-6
324:Yield to maturity
309:Asset swap spread
293:reinvestment risk
222:actual cash flows
16:(Redirected from
876:
864:Embedded options
789:Convertible bond
632:Zero-coupon bond
572:Convertible bond
557:Commercial paper
440:
433:
426:
417:
416:
412:
406:
396:
370:
351:
189:function of the
140:(bp, or 0.01%).
99:embedded options
21:
884:
883:
879:
878:
877:
875:
874:
873:
849:
848:
847:
842:
813:
804:Extendible bond
794:Embedded option
770:
734:
636:
597:High-yield debt
587:Fixed rate bond
582:Extendible bond
530:
511:Government bond
506:Distressed debt
472:
449:
444:
404:
393:
377:
375:Further reading
367:
348:
332:
305:
289:prepayment risk
254:
153:
126:early repayment
48:those envisaged
23:
22:
15:
12:
11:
5:
882:
872:
871:
866:
861:
859:Bond valuation
844:
843:
841:
840:
834:
828:
821:
819:
815:
814:
812:
811:
806:
801:
796:
791:
786:
780:
778:
772:
771:
769:
768:
763:
758:
753:
748:
742:
740:
736:
735:
733:
732:
727:
722:
717:
712:
707:
705:Risk-free bond
702:
697:
692:
690:Mortgage yield
687:
682:
677:
672:
667:
662:
657:
652:
646:
644:
642:Bond valuation
638:
637:
635:
634:
629:
624:
619:
617:Perpetual bond
614:
609:
604:
599:
594:
589:
584:
579:
574:
569:
564:
559:
554:
549:
544:
538:
536:
532:
531:
529:
528:
523:
521:Municipal bond
518:
513:
508:
503:
502:
501:
496:
489:Corporate bond
486:
480:
478:
474:
473:
471:
470:
465:
460:
454:
451:
450:
443:
442:
435:
428:
420:
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397:
391:
376:
373:
372:
371:
365:
352:
346:
331:
328:
327:
326:
321:
316:
311:
304:
301:
296:
295:
290:
287:
286:extension risk
284:
277:bond convexity
273:interest rates
253:
250:
246:interpolations
238:
237:
214:expected value
183:path-dependent
179:
178:
171:
169:interest rates
152:
149:
9:
6:
4:
3:
2:
881:
870:
867:
865:
862:
860:
857:
856:
854:
838:
835:
832:
829:
826:
823:
822:
820:
816:
810:
809:Puttable bond
807:
805:
802:
800:
797:
795:
792:
790:
787:
785:
784:Callable bond
782:
781:
779:
777:
773:
767:
764:
762:
759:
757:
754:
752:
749:
747:
744:
743:
741:
737:
731:
728:
726:
723:
721:
718:
716:
713:
711:
708:
706:
703:
701:
698:
696:
695:Nominal yield
693:
691:
688:
686:
683:
681:
678:
676:
673:
671:
670:Current yield
668:
666:
665:Credit spread
663:
661:
658:
656:
653:
651:
648:
647:
645:
643:
639:
633:
630:
628:
625:
623:
622:Puttable bond
620:
618:
615:
613:
610:
608:
605:
603:
600:
598:
595:
593:
590:
588:
585:
583:
580:
578:
575:
573:
570:
568:
565:
563:
560:
558:
555:
553:
552:Callable bond
550:
548:
545:
543:
540:
539:
537:
533:
527:
524:
522:
519:
517:
514:
512:
509:
507:
504:
500:
497:
495:
492:
491:
490:
487:
485:
482:
481:
479:
475:
469:
466:
464:
461:
459:
456:
455:
452:
448:
441:
436:
434:
429:
427:
422:
421:
418:
410:
403:
398:
394:
388:
384:
379:
378:
368:
366:0-13-149908-4
362:
358:
353:
349:
347:0-471-38587-5
343:
339:
334:
333:
325:
322:
320:
317:
315:
312:
310:
307:
306:
300:
294:
291:
288:
285:
282:
281:
280:
278:
274:
269:
267:
263:
259:
249:
247:
243:
235:
234:
229:
228:
223:
219:
215:
211:
210:
209:
207:
203:
198:
196:
192:
188:
184:
176:
172:
170:
166:
165:
164:
162:
158:
148:
146:
141:
139:
135:
131:
127:
123:
122:callable bond
118:
116:
112:
108:
104:
100:
96:
92:
88:
84:
80:
76:
73:(OAS) is the
72:
65:
61:
57:
53:
49:
45:
41:
37:
33:
29:
19:
818:Institutions
776:Bond options
720:Yield spread
699:
612:Lottery bond
542:Accrual bond
468:Fixed income
382:
356:
337:
297:
270:
257:
255:
239:
232:
231:
226:
225:
221:
205:
199:
180:
154:
142:
138:basis points
119:
75:yield spread
70:
69:
715:Yield curve
675:Dirty price
650:Clean price
526:Global bond
494:Senior debt
484:Agency bond
447:Bond market
359:. Pearson.
195:Monte Carlo
187:behavioural
130:refinancing
79:yield curve
52:Post crisis
853:Categories
330:References
191:stochastic
175:prepayment
161:volatility
151:Definition
40:simulation
655:Convexity
463:Debenture
340:. Wiley.
283:call risk
252:Convexity
212:Take the
173:Variable
167:Variable
730:Z-spread
685:I-spread
680:Duration
319:Z-spread
314:I-spread
303:See also
262:mortgage
157:I-spread
145:Z-spread
87:security
83:discount
839:(SIFMA)
202:finance
32:"Trees"
833:(ICMA)
827:(CMSA)
660:Coupon
562:Consol
389:
363:
344:
216:(mean
134:yields
115:option
405:(PDF)
95:model
91:price
56:local
458:Bond
387:ISBN
361:ISBN
342:ISBN
185:and
107:bond
58:and
44:PDEs
42:and
218:NPV
113:or
81:to
36:OAS
855::
407:.
163::
147:.
85:a
439:e
432:t
425:v
411:.
395:.
369:.
350:.
233:X
227:X
66:.
20:)
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.
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