10.1.7 Calculate OAS
For fixed-rate instruments, such as instruments for which the deterministic cash flows are the same as the stochastic cash flows, the OAS is by definition equal to the static spread.
Note:
This statement is true in the case of continuous compounding. For discrete compounding, this approximation has a negligible impact on the accuracy of the results.The OAS is also calculated with an optimized version of the Newton-Raphson algorithm. To get a gist of the Newton-Raphson method, see the previous section, with the following substitutions:
Equation 10
Figure 10-11 Equation 10
Description of the Transfer Pricing Option Cost Equation 10 follows: