I know that OAS + Call option = Zpread and i know that as the call option incr, the OAS will decr. My question refers to why is that when OAS is less than its true value and the cost of the option is bigger than what it should be is the MBS considered CHEAP??? i dont get it!! Thx!
its not that the cost of the option is bigger than it should be, it is that you can get a better yield relative to another MBS with a similar structure.
so all else equal the the mbs with the higher OAS will be considered cheaper relative another issue of similar characteristics, and also will have a smaller option cost… thx!