An analysis of a CMO structure using the Monte Carlo method indicated the fol- lowing assuming 12% volatility:

OAS Static Spread (basis points) (basis points) Collateral 80 120 Tranche PACIA 40 PACIB 55 PACIC 65 Aus 60 80 95 PAC II 95 125 Support 75 250

a. Calculate the option cost for each tranche.

b. Which tranche is clearly too rich?

c. What would happen to the static spread for each tranche if a 15% volatility is assumed?

d. What would happen to the OAS for each tranche if a 15% volatility is assumed?AppendixLO1