What is the meaning of option-adjusted spread (OAS)?

1. A measurement of the return provided to an investor from a financial instrument that is either an option or that includes an option. The option-adjusted spread calculations break up a security into separate cash flows. Each of those cash flows is discounted at a unique discount rate appropriate for its maturity. The discount rates are obtained from a benchmark yield curve. The benchmark yield curve is simply the currently available (spot) yields for risk-free investments of various maturities. Since U. S. Treasury obligations are not considered to have any credit risk, Treasury rates are used. OAS is not quoted as a yield. Instead, it is quoted as a difference, or spread, in basis points. 2. A valuation technique for valuing financial instruments, portfolios of financial instruments, or financial institutions with options. This tool is one component used in the Office of Thrift Supervision net portfolio value model for modeling the interest rate risk in complex financial instruments. This methodology is also used by high-end commercial interest rate risk analysis models.