Option-adjusted spread


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Option-adjusted spread (OAS)

(1) The spread over an issuer's spot rate curve, developed as a measure of the yield spread that can be used to convert dollar differences between theoretical value and market prices. (2) The cost of the implied call embedded in an MBS, defined as additional basis-yield spread. When added to the base yield spread of an MBS without an operative call produces the option-adjusted spread.

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 ?
The option-adjusted spread on the Bloomberg Barclays index of investment-grade debt in emerging markets - a measure of yield above U.S.
Non-investment grade yield spreads hit a record low in June 2007, when the spread was only 2.6% and the option-adjusted spread was just 2.49%.
The option-adjusted spread helps investors compare a fixed-income security's cash flows to reference rates, while also valuing embedded options against general market volatility.
High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 11 bps wider.
Mubadala's bonds maturing 2021 were trading with an option-adjusted spread (OAS) at 237 basis points on Thursday, while the spread on the IPIC 2021 bond was at 282 basis points.
Davidson himself is known for developing prepayment and option-adjusted spread models, working at Merrill Lynch before going solo.
Introduction to option-adjusted spread analysis, 3d rev.ed.
Bloomberg changed all that by simultaneously becoming a phone company and computer manufacturer so the people with the most at stake-whether in London or Los Angeles-could calculate the option-adjusted spread on every trade while they were reading stories about the latest man-made and natural disasters.
If the derivative or security is valued by the entity using a valuation model, the auditor does not function as an appraiser and is not expected to substitute his or her judgment for that of the tity's management.(16) Examples of valuation models include the present value of expected future cash flows, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.
Yield spreads relative to Treasuries, whether expressed in nominal terms or as derived by an option-adjusted spread (OAS) model for bonds with embedded options, are the most commonly used means of comparing the relative attractiveness of securities across the maturity and risk spectrums.