Session 15: Fixed Income: Structured Securities
Reading 57: Valuing Mortgage-Backed and Asset-Backed Securities
LOS e: Evaluate a mortgage-backed security (MBS) using option-adjusted spread (OAS) analysis.
Wanda Brunner is evaluating the two tranches shown below for a hypothetical sequential-pay CMO structure.
|
Tranche |
OAS (bps) |
Z-spread (bps) |
Effective duration |
|
I |
95 |
100 |
4.25 |
|
II |
100 |
90 |
4.25 |
Which CMO tranche should Brunner trade?
|
A) |
Buy Tranche II and sell Tranche I. | |
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C) |
Buy Tranche I and sell Tranche II. | |
Tranche I option cost = 100 – 95 = 5 basis points
Tranche II option cost = 100 – 90 = 10 basis points
Tranche I has a higher OAS and lower option cost than Tranche II, and the effective durations of the two tranches are equal. Therefore:
- Tranche I is undervalued on a relative basis (“cheap”), and we should buy it.
- Tranche II is overvalued on a relative basis (“rich”), and we should sell it.
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发表于 2010-4-21 14:30
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