FRM 2008 Practice PIII question 20 - Bond option adjusted spreads

[fullofquestions]

This question is mostly related to verbage. Please have a look at the attached pdf for a better formatted question. Could someone confirm if the option cost is in fact provided by the 'Nominal Spread' row or by the 'option free nominal spread' row?

GIVEN: The OAS of Y is higher than that of X.
If we use 'Nominal Spread' then Y is lower than X, so it undervalued compared to X.
If we use 'Option free nominal spread' then X and Y are on equal footing.

Either way, it looks like you can only arrive at a conclusion in reference to the other instrument so answers a and b should be 'x is undervalued compared to y' and 'y is undervalued compared to x.' Choices c and d don't see to be applicable with the given data. Could someone correct me here? Much appreciated.

 

[ashm07]

The higher the difference, nominal spread - OAS, the more it is undervalued. hence Y is undervalued of the two. Please inline the question next time.

 

[hsuwang]

I think you compare OAS to its option cost, where option cost = Z spread - OAS
for X, 120-100 = 20,
and Y, 115-105=10,
so Y has a lower option cost but at the same time has a slightly higher OAS, so it is undervalued.

Thanks.