Option-adjusted Spread

Option-adjusted Spread

Option adjusted spread (OAS) is the flat spread which has to be added to the treasury yield curve in a pricing model (that accounts for embedded options) to discount a security payment to match its market price. OAS is hence model dependent. This concept can be applied to a mortgage-backed security (MBS), option, bond and any other interest rate derivative. In the context of an MBS, the option relates to the right of property owners, whose mortgages back the MBS, to prepay the full mortgage amount.