Introduction to Option-Adjusted Spread Analysis: Revised and Expanded Third Edition of the OAS Classic by Tom Windas

CHAPTER 12

ESTIMATING FAIR VALUE

THUS FAR, THE FOCUS has been on using option-adjusted spread (OAS) analysis as a tool for measuring the incremental return of bonds with significantly different structures, that is, of bonds with and without embedded options. The emphasis has been on the determination of an OAS or option-free yield spread, given the bond’s price, a risk-free benchmark volatility (uncertainty) assumption, and a risk-free benchmark yield curve. It was also stated that though the spread resulting from such an analysis could be thought of as a pure credit spread, the value itself conveys little information about whether the underlying bond is appropriately valued, forcing potential investors to decide for themselves whether the incremental ...