An analysis of a CMO structure using the Monte Carlo method indicated the following, assuming 12% volatility:

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An analysis of a CMO structure using the Monte Carlo method indicated the following, assuming 12% volatility:

OAS

(basic points)

Static Spread

(basic points)

Collateral Tranche 80 120 PAC I A 40 60 PAC I B 55 80 PAC I C 65 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?

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