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

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