Computing spread duration

To calculate spread duration, we increase and decrease a security’s OAS by some
amount and, holding Treasury (spot) rates and volatilities at current levels, compute
two new prices based on these new spreads:
POASñ100 bpsñPOASò100 bps
2îPBase caseOAS
î100
Spread duration is the average percentage change in the security’s price given the
lower and higher OASs. It allows us to quickly translate a basis point change in
spreads to a percentage change in price, and by extension, a dollar value change in
a position. For example, the impact of a 20 bp shift in OAS on the price of a bond
with a spread duration of 4.37 is estimated by (0.20î4.37)ó0.874%. Therefore, a
$50 million position in this security would decline by $43.7K ($50 millionî0.874) if
spreads widened by 20 bps.