Sự khác biệt đáng kể nhất giữa MBSs và các trái phiếu có thể được gọi là rằng các tùy chọn nhúng với trước đây là liên tục trong khi các lựa chọn duy nhất được nhúng vào trong sau này có xu hướng rời rạc, và các tùy chọn nhiều lần trong một MBS có thể được kích hoạt bởi các biến nhiều hơn nữa. | 200 FINANCIAL ENGINEERING RISK MANAGEMENT AND MARKET ENVIRONMENT to help determine if a given callable is priced fairly in the market. They simply compare the synthetic bullet bond in price and credit terms with a true bullet bond. As a final comment on callables and risk management consider the relationship between OAS and volatility. We already know that an increase in volatility has the effect of increasing an option s value. In the case of a callable a larger value of Oc translates into a smaller value for Pc. A smaller value for Pc presumably means a higher yield for Pc given the inverse relationship between price and yield. However when a higher lower volatility assumption is used with an OAS pricing model a narrower wider OAS value results when many investors hear this for the first time they do a double take. After all if an increase in volatility makes an option s price increase why doesn t a callable bond s option-adjusted spread as a yieldbased measure increase in tandem with the callable bond s decrease in price The answer is found within the question. As a callable bond s price decreases it is less likely to be called away assigned maturity prior to the final stated maturity date by the issuer since the callable is trading farther away from being in-the-money. Since the strike price of most callables is par where the issuer has the incentive to call away the security when it trades above par and to let the issue simply continue to trade when it is at prices below par anything that has the effect of pulling the callable away from being in-the-money as with a larger value of Oc also has the effect of reducing the call risk. Thus OAS narrows as volatility rises. Borrowing from the drift and default matrices first presented in Chapter 3 a credit cone showing hypothetical boundaries of upper and lower levels of potential credit exposures might be created that would look something like that shown in Figure . This type of presentation provides a very .
