Option-Adjusted Spread (OAS)¶
One-line definition¶
Z-spread with the value of any embedded option (call, put, prepayment) stripped out — the spread left over after accounting for optionality.
Why PMs care¶
For a callable corporate bond or an agency MBS, part of the observed Z-spread just compensates for the issuer's/borrower's option, not credit risk. Comparing bonds on raw Z-spread instead of OAS overstates the apparent value of the optioned bond.
Why this isn't implemented in src/pm¶
Computing OAS requires simulating interest-rate paths against a
term-structure model (e.g. a short-rate lattice or Monte Carlo) and
averaging option-adjusted cash flows across paths — that's a materially
different kind of computation from the closed-form/root-finding functions
in this repo, and per AGENTS.md rule 5, this repo doesn't add that
complexity before the deterministic pieces (Z-spread, duration, curve
construction) are solid. Treat this page as the conceptual bridge to that
future work, not a working implementation.