Top traders, investors, and analysts agree that one method, option-adjusted spread (OAS) analysis, is the most useful way to compare and value securities with options. Nearly every day the bond market figures out a new way to structure securities, most of which involve options.
This book explains OAS analysis in plain English, presenting each step in the method clearly and concisely. Topics covered include:
Why yield-based analysis breaks down for nonbullet bonds
How to model put and call provisions as embedded options
How to distinguish the intrinsic and time components of option value
How to model interest-rate volatility, future interest rates, and future bond prices
How to calculate option-free price and yield
How to estimate the "fair value" of a bond
How to calculate implied spot and forward rates
Salespeople, traders, and investors will want to read this book and keep it on their desks.