Forgetting that in an FRA, the long position wants interest rates to rise! What is he referring to? Any examples?
One more on the same thread: If OAS < z-volatility spread, then the option has a value to the issuer and it is a call.
- Forward Rate Agreement – essentially the long position has agreed to pay a certain interest rate on a notional amount. therefore they want interest rates to rise over the period of the contract, so at the end of it, the rate they agreed to pay is lower than current market rates (ie they have profited from the FRA). this is in the derivatives chapter. 2) OAS is the spread after taking out the effect of the option. Z-spread still includes the effect of the option. Therefore if Z-spread is higher than OAS, the option is causing the spread to be higher ie investors are demanding a higher spread to hold the debt because of the option. this implies that the option has value to the issuer (not the investor), therefore is a call. this also works in reverse. If OAS is higher than Z-spread, it implies that the option has value to the investor (because they’re accepting a lower spread to hold the bond when the option is taken into account). Therefore this is a put option.