Pop quiz on OAS

A. OAS excludes default risk from its calculation; therefor OAS has limited applicability to the analysis of speculative grade bonds. B. OAS uses monte carlo simulation to factor out default risk from the spread; therefore OAS is not well suited to the analysis of speculative gread bonds

I may be totally wrong on this but I’ll bite. OAS should only exclude the option, which means that credit/default/IR risk should still be priced in.


Whats wrong with B? I vaguely remember OAS is derived using monte carlo for level II

I do not think OAS factors in default risk.

Isnt that what B is saying? Factoring out default risk=Not considering default risk in spread. Thus not good for high yield bond.