Option Adjusted Spread

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Option Adjusted Spread

In fixed-income securities with embedded options, the yield spread between two securities calculated as if the embedded options do not exist. Different models calculate the OAS slightly differently, but the basic equation is rendered as:

OAS = yield spread - spread due to the options

This is important in complex derivatives such as mortgage-backed securities. See also: Black-Scholes Model.
References in periodicals archive ?
Despite the theoretical and computational advantages of the price-process model, and despite the fact that the large cross-sectional time-series variation in the fitted option adjusted spreads of interest-rate-process models create serious conceptual problems in understanding and explaining market prices (Ho, 1997), the simulation-based, interest-rate-process model represents an earlier model whose more widespread usage by traders might result in substantial buy and sell orders that could artificially push mortgage market prices in the direction of their values computed using that model (Davidson et al.
However, thanks to a 47 basis point rise in option adjusted spreads, their returns fell short of Treasuries by 2.