Abstract
The study develops a model from which an option-adjusted spread approach is utilized for pricing individual mortgage servicing contracts. The pricing model is comprised of a stochastic interest rate process, an exogenous prepayment function and an assumed servicing cost, all of which jointly determines the contract’s future net cash flows and the rate at which to discount these cash flows. Then a scenario analysis is employed to examine a myriad of risk exposures of servicing contracts under various economic environments. The implication of this paper is potentially useful for mortgage servicers to investigate the policy-related issues. The results indicate：（1）the higher the interest rate volatility, the lower will be the price of a MSR.（2）the larger the speed of the adjustment factor, the length of time for varying interest rates is short. The price of a MSR decreases when the adjustment factor is small.（3）The price of the MSR increases when the notional loan amount increases, but it is increased more than proportionately to the loan amount being serviced, either in periods of high or low interest rate volatility.