Zspread/OAS refresher

I need ur help to make something clear in my mind; why do we say that Zspread is not model dependant whereas OAS can vary according to model used ? I’m wondering this because of Q36 p473 book5 thanks

here is the Q: which statement is correct ? “given a callable bond’s price and relative to a given spot rate curve, more than one zspread might exist depending on the outcomes of the specific model used to generate this zspread” “given a callable bond’s price and relative to a given spot rate curve, more than one OAS might exist depending on the outcomes of the specific model used to generate this OAS”

From my understanding, the models used in the OAS calculation are used to predict the volatility of the stock which will either increase or decrease its yield based on which option is associated with the security (put vs call). Volatility risk as calculated by these models is not a factor in the Z-spread because the securities are assumed to be optionless. I hope this helps.

for call: Z-spread>OAS spread>0 for put: Z-spread

TheChad Wrote: ------------------------------------------------------- > From my understanding, the models used in the OAS > calculation are used to predict the volatility of > the stock which will either increase or decrease > its yield based on which option is associated with > the security (put vs call). > > Volatility risk as calculated by these models is > not a factor in the Z-spread because the > securities are assumed to be optionless. > > I hope this helps. different volatility assumptions when valuing bonds; Zspread doesn’t care about volatility whereas OAS does … ok it makes sence thanks Chad

getterdone Wrote: ------------------------------------------------------- > for call: Z-spread>OAS spread>0 > > for put: Z-spread OAS and for puts option cost is -ve and zspread is less OAS but I did not get the zero part. Could you please explain a bit or some reading reference.

sorry i remember this for myself (however I found this is another thread) the >0 part implies that the option cost has value for puts however option cost is <0

Take MBS for example. It’s really clear that the prepayment option is worth something but it’s not at all clear under what circumstances it is going to be exercised. That means that if you are trying to estimate the OAS you have to include assumptions about when that option will be exercised. In any event, even for a really simple option like a simple equity call option it’s not clear what the option should be worth because there just aren’t option pricing models that accurately price all options. An embedded option in a bod ought to be tougher.

as the call is beneficial to the bond issuer, he has to pay for the privilege somewhere option cost>0 —> OAS

I think that the most important part of the Z-spread and OAS is the formula: Z-spread - OAS= Value of the option If you remember that formula then you can make sense of the other parts of the formula, depending on what you are looking for.