When looking at a simple structure like a sequential pay CMO :
.
if in the base case we have a volatility of 10% and OAS of 50
then volatility can either
- increase to 30% and OAS decreases to 20
or - decrease to 10% and OAS increases to 77
if volatiltily increases, the value of the option increases and because im short the option, the value of a mortgage backed securty decreases. and vice verse for lower volatility, option embedded in mortgage security decreases and therefore value of securtiy decreases.
a higer OAS, means a cheaper security - ok - so now i dont understand why OAS gets larger for less volatitly ?? |