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For an MBS, the word "option" in option-adjusted spread relates primarily to the right of property owners, whose mortgages back the security, to prepay the mortgage amount. Since mortgage borrowers will tend to exercise this right when it is favourable for them and unfavourable for the bond-holder, buying an MBS implicitly involves selling an ...
option-adjusted spread, or the extra yield demanded by the security holder to compensate for the mortgage repayment option; current-coupon spread; volatilities; convexity; cost of carry; While all these factors can be important in accounting for changes in MBS returns, in practice a particular user may only select a subset.
The fact that MBS investors are exposed to downside prepayment risk, but rarely benefit from it, means that these bonds must pay an incrementally higher interest rate than similar bonds without prepayment risk, to be attractive investments. (This is the embedded "option cost" that results in a lower option-adjusted spread.)
Spread duration is the sensitivity of a bond's market price to a change in option-adjusted spread (OAS). Thus the index, or underlying yield curve, remains unchanged. Thus the index, or underlying yield curve, remains unchanged.
An options chain is a valuable tool that helps options traders make quick decisions and displays a range of relevant information at one glance.
The Z-spread of a bond is the number of basis points (bp, or 0.01%) that one needs to add to the Treasury yield curve (or technically to Treasury forward rates) so that the Net present value of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (including accrued interest).
Options trading can be complex, and the trading jargon may confuse even experienced investors and traders. Two of the most common options contracts to understand are call and put options.
Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by commercial and multifamily mortgages rather than residential real estate. CMBS tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets.