OAS - mostly a question about wording

CFA Level II Fixed Income
#1

Question:

Of the four MBS securities under consideration, which MBS will add the most value relative to the risk associated with the security assuming the effective durations of the MBS securities is approximately the same? Security, OAS, Z-spread, nominal, spread MBS-W, .25% MBS-X, .50% MBS-Y, .30% MBS-Z, .35%

Ans:

MBS X has the highest OAS relative to the cost of the option embedded in the MBS. Therefore it is the most attractive alternative.

I’m curious to know if the mention of the similar duration is the only ‘other’ piece of information that you need to answer the question. If you add the OAS to the spot treasury curve then you have the curve of a Fixed Income instrument that is rewarding you for the extra liquidity and credit risk.

In any event, I initially saw the answer as, ‘pick the smallest OAS’ although after thinking about it, the highest OAS rewards you the most BUT you have higher credit and liquidity risk. I guess I’m finding it difficult to pinpoint where in the question it is clear that all four MBS have similar qualities and you should only consider the OAS to answer the question. Is my reasoning correct or is there more calculation to it? Do we need to do anything with the Z-spread or Nominal spread? (I don’t think so)

Any thoughts?

#2

Since the answer talks about the cost of the option I think you need to know the Z spread. Z spread - O spread= cost of the option. After finding the cost, you compare it to the OAS. the one with the lowest cost and highest OAS is the one with the higher relative benefit.

#3

I think you’re right and the question is worded poorly.