Option Adjusted Spread (OAS) higher, interest, following, understand

water2012

Please help me to understand the following statement


The higher the interest rate volatility assumed, the lower the OAS. In the case of a putable bond, the higher the interest rate volatility assumed, the higher the OAS.

(CFA Institute. Level 1 Volume 5 - Equity and Fixed Income, 5th Edition. Pearson Custom Publishing). page(477)

Regards/Manoj Badera

suyash1989

option adjust spread is the spread of the bond to Tbond would have been if the bond is option free. so when interest rate volatility increases, call/put provisions would be more valuable. call options would be more expensive to borrow(the borrower owns the call), therefore lower OAS for the borrower, put options would be more expensive to lend ( the lender owns the put), therefore a higher OAS for the borrower. it is confusing, i hope i got it right.

FVPV

don't have the curriculum in front of me right now.
is there any information in the test of the task, that you should put yourself in the issuer's perspective? because it's just the other way round for the lender.



Edited 1 time(s). Last edit at Wednesday, March 24, 2010 at 01:22PM by chefe_.