Financial Risk Manager Part 1

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A financial analyst at a large investment firm is evaluating and selecting MBS pools to invest in. The analyst uses a Monte Carlo simulation to value the MBS pools and to determine the option-adjusted spread (OAS) for each of the pools being examined. Which of the following statements regarding OAS and MBS valuation techniques is most appropriate?

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The OAS valuation procedure involves making an initial estimate of the OAS, followed by conducting a Monte Carlo simulation using the yield on US Treasury bills as the discount rate.

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When an MBS pool with a high OAS is identified, it should be purchased immediately to take advantage of this relatively attractive investment compared to other MBS.

The OAS valuation procedure involves continually changing the OAS estimate until the simulated price is the same as the market price.

Mortgage rates are perfectly correlated with US Treasury bond rates, and therefore OAS is calculated as the expected MBS return plus the return on US Treasury bonds.