Assignment:
Q1. Two portfolio managers are discussing the meaning of option-adjusted spread. Here is what each asserted:
Manager 1: “The OAS is a measure of the value of the option embedded in the bond. That is, it is the compensation for accepting option risk.”
Manager 2: “The OAS is a measure of the spread relative to the Treasury on-the-run yield curve and reflects compensation for credit risk and liquidity risk.” Comment on each manager’s interpretation of OAS.
Q2. For some MBS and ABS, the cash flows are path-dependent. Explain this statement.
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.