Ah our old foe, OAS. A concept that has caused numerous confusions from my days as a Level 1 candidate. Each year, I merely memorise some facts about it, enough to get over the line.
This year I finally want to understand this thing.
Can someone please give as simple an explanation as possible of the OAS, how it relates to Z spread and when given a table of OAS. Z etc how we determine whether it is callable or puttable.
I know everyone wants to have some really fun OAS related discussions. Where are youuuuuuuuu?
This is for call options:
OAS = z-spread - value of call option
I found a pretty good thread on this topic:
Thanks Mr RS - I’ll have a read,
Anyone else want to try demystify?
z-spread - bps spread for risky bond added to each point of yield curve of non-risky t-bond to equal with the price of this risky bond.
OAS - z-spread additionally adjusted for bonds with embedded options to equal with such bond’s price.
z-spread = OAS if no embedded options in risky bond.
Demystified? If still not, DuckDuckGo is your friend.