I am so confused, is it the OAS = Option risk or OAS = credit risk + liquidity risk?
Please comment
hey pass,
OAS = credit risk + liquidity risk
z-spread = credit risk + liquidity risk + option risk
the term option adjusted spread is confusing. A more clear way to refer to this spread should be “spread before option risk”
option adjusted spread is equivalent to the spread of an identical bond without any embedded options