Hi guys, Although I am not really helping others (I unfortunately have difficulties to explain stuff :-s)I need your help for the following: What is the OAS really representing? Is this a premium over the benchmark? It says: Z-spread = OAS + option It then means that if the bond is option-free, the OAS just represent the spread of the bond over the benchmark - is the benchmark Risk-free then?..Is that right or may I have missed something? Thanks for your unvaluable help! Paul PS: I struggled with that last year and still don’t figure it out :-s
Ummm, I finally get it out of Schweser: OAS represents the credit risk and liquidity risk over the benchmark. Why aren’t we Friday today? ^^ Paul
Everything except the option cost is in the OAS. The pure option cost is the Z-Spread - OAS. The Z-Spread is the spread to apply on the benchmark such that the result is the market price of the bond. The OAS tries to explain the liquidity and the credit risk portions of the Z-Spread, while the Option cost explains the pure option cost ( which in turn depends on volatility for the most part)