KIC000013 - Option-Adjusted Spread (continued) .:. The...

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Unformatted text preview: Option-Adjusted Spread (continued) .:. The option-adjusted spread (OAS) was developed as a measure of the yield spread (in basis points) that can be used to convert dollar differences between value and price . :. Thus, basically, the OAS is used to reconcile value with market price . :. The OAS is a spread over the spot rate curve or benchmark used in the valuation . :. The reason that the resulting spread is referred to as option-adjusted is because the cash flows of the security whose value we seek are adjusted to reflect the embedded option. ",,,,"".'''.'''''''''-''.''''''''-- , """"''''''''"'''''~' Option-Adjusted Spread (continued) .:. Translating OAS to Thenretlcal Value o Although the product of a valuation model is the GAS, the process can be worked in reverse. D For a specified OA8, the valuation model can determine the theoretical value of the security that is consistent with that ON< o As with the theoretical value, the OAS is affected by the assumed interest rate volatility,...
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This note was uploaded on 09/06/2011 for the course FIN 428 taught by Professor Hood during the Fall '11 term at Iowa State.

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KIC000013 - Option-Adjusted Spread (continued) .:. The...

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