Citicorp's mortgage valuation model: Option-adjusted spreads and option-based durations
✍ Scribed by Alan Jay Brazil
- Publisher
- Springer US
- Year
- 1988
- Tongue
- English
- Weight
- 604 KB
- Volume
- 1
- Category
- Article
- ISSN
- 0895-5638
No coin nor oath required. For personal study only.
✦ Synopsis
Citicorp's mortgage valuation model combines a description of interest rate dynamics and a prepayment model together with a theory of security pricing to produce a measure of valuation called the option-adjusted spread (OAS). The OAS can be used to determine mispricing across both coupons and MBS programs, e.g., GNMA and FNMA, because it is free of the option cost.
In addition, the option-adjusted spread can be used to calculate durations that fully reflect the impact of the option on the price of an MBS as interest rates move. These option-based durations can more effectively hedge MBS positions than other simpler duration measures.