Option-adjusted Spread - Definition

Definition

In contrast to the simple "yield curve spread" measurement of bond premium over a pre-determined cash-flow model, the OAS describes the market premium over a model including two types of volatility:

Designing such models in the first place is complicated because prepayment variations are a behavioural function of the stochastic interest rate. (They tend to go up as interest rates come down.)

OAS is an emerging term with fluid use across MBS finance. The definition here is based on Lakhbir Hayre's Mortgage Backed Securities text book. Other definitions are rough analogs:

Take the expected value (mean NPV) across the range of all possible rate scenarios when discounting each scenario's actual cash flows with the treasury yield curve plus a spread, X. The OAS is defined as the value of X equating the market price of the MBS to its value in this theoretical framework.

Treasury bonds may not be available with maturities exactly matching likely cash flow payments so some interpolation may be necessary to make this calculation.

Read more about this topic:  Option-adjusted Spread

Other articles related to "definition, definitions":

ESPN - High Definition
... ESPN launched its 720p high-definition simulcast, originally branded as ESPNHD, on March 20, 2001 ... shows, along with most live events on ESPN, use high definition ... from non-HD sources is presented in a standard definition, 43 format with stylized pillarboxes ...
Definition of Dietary Fiber
... defined to be the components of plants that resist human digestive enzymes, a definition that includes lignin and polysaccharides ... The definition was later changed to also include resistant starches, along with inulin and other oligosaccharides ... Official definition of dietary fiber differs a little among different institutions Organization (reference) Definition Institute of Medicine Dietary fiber consists of nondigestible carbohydrates and lignin that ...
Definition - In Medicine
... In medical dictionaries, definitions should to the greatest extent possible be simple and easy to understand, preferably even by the general public useful clinically or in ...
Pashtun People - Pashtuns Defined
... These three definitions may be described as the ethno-linguistic definition, the religious-cultural definition, and the patrilineal definition ...
Sustainable Development - Definition
... Report, which included what is now one of the most widely recognised definitions "Sustainable development is development that meets the needs of the present without compromising the ... It offers an integrated vision and definition of strong sustainability ... It generates a more nuanced definition of sustainable development “the need to ensure a better quality of life for all, now and into the future, in a just and equitable manner, whilst ...

Famous quotes containing the word definition:

    Perhaps the best definition of progress would be the continuing efforts of men and women to narrow the gap between the convenience of the powers that be and the unwritten charter.
    Nadine Gordimer (b. 1923)

    ... we all know the wag’s definition of a philanthropist: a man whose charity increases directly as the square of the distance.
    George Eliot [Mary Ann (or Marian)

    Was man made stupid to see his own stupidity?
    Is God by definition indifferent, beyond us all?
    Is the eternal truth man’s fighting soul
    Wherein the Beast ravens in its own avidity?
    Richard Eberhart (b. 1904)