Hi All,Regarding OAS and option embedded interest rate derivatives, as per riskglossary(http://www.riskglossary.com/link/option ... spread.htm):The value of option-adjusted spread analysis is that it enables investors to separate out optionality and judge the degree to which an instrument's yield compensates them for credit risk, liquidity risk or other such factors. Suppose an investor is comparing two similar bonds. Both have comparable maturities, credit qualities and liquidity, but they have different embedded options. The investor might purchase whichever bond has the higher option-adjusted spread?that bond would offer higher compensation for the risks being taken.Here we are considering only risk related to interest rate, credit risk, liquidity risks and few others and we say that if these risks are same(i.e. same maturities, credit rating, liquidity etc) for two embedded options, one may buy instrument with higher OAS. My doubt is that here we are not considering prepayment risk and there are chances that instrument with higher OAS has high prepayment risk and therefore offers higher compensation and therefore we cannot directly say that - The investor might purchase whichever bond has the higher option-adjusted spread?that bond would offer higher compensation for the risks being taken.Please clarify.

The point of an OAS model for MBS is to adjust for the prepayment risk, no more no less. It is miserably hard to do at the moment, but that is an entirely separate topic.

QuoteOriginally posted by: bearishThe point of an OAS model for MBS is to adjust for the prepayment risk, no more no less. It is miserably hard to do at the moment, but that is an entirely separate topic.Thank you for reply. I understand your point regarding role of OAS in MBS. However, I am keen to understand OAS from application perspective for any embedded option. e.g. Just by looking at OAS curves of two securities with same credit risk and liquidity(and other risks apart from optionality), can we say that high OAS of one instrument over another sends a trading signal to make profits. Hence as a crude eg, can buy high OAS security and sell low OAS one or something else like that?