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Explanation:
The correct answer is A.
The option-adjusted spread (OAS) is a financial metric used to evaluate the relative value of a security by comparing its market price to its model value. The OAS is defined as the spread that, when added to risk-neutral rates for the computation of discounted values, makes the market price of a security equal to the price of its corresponding model. This means that the OAS is the constant spread that needs to be applied to the risk-neutral interest rates such that the present value of the cash flows, discounted at these rates, equals the market price of the security.
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Q.1632 An option-adjusted spread is a widely-used measure of the relative value of a security, that is, of its market price relative to its model value. In addition, an option-adjusted spread can be elaborated as spread which makes a security’s market price _____ the price of its corresponding model when discounted values are computed at risk-neutral rates plus that spread.
A
equal to
B
greater than
C
lesser than
D
None of the above