debt and equity as options
TRANSCRIPT
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8/12/2019 Debt and Equity as Options
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Debt and Equity as Options
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Reviewing Put Options
Gives the holder the right to sell the underlyingasset S for a fixed price K on or before maturity T.
At time T if S>K the put holder would not exerciseand the option pay off is 0
At time T if S
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Reviewing Call Options
Gives the holder the right to sell the underlyingasset S for a fixed price K on or before maturity T.
At time T if KK the put holder will exercise and theoption pay off is -S
T - Ke-rt
Pay off to the holder = Max (0, ST - Ke-rt)
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Zero Coupon Bonds
Value of Zero Coupon Bond with Face Value K
that matures at time T is Ke-rt
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Debt and Equity as Options
Equity is a call option The underlying asset comprises the assets of the firm V
The strike price is the face value of the bond D
At time T if the assets of the firm are greater than thevalue of the debt (V>D)
The shareholders have an in-the-money call
They will pay the bondholders and call in the assets ofthe firm
Payoff to Shareholder = V-D
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Debt and Equity as Options
Equity is a put option.
The underlying asset comprises the assets of thefirm V
The strike price is the face value of the bond D
At time T if the assets of the firm are less than
the value of the debt (V
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Debt and Equity as Options
At time T if the assets of the firm are less than
the value of the debt (V
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Debt and Equity as Options
Payoff at maturity
if V>D
Payoff at maturity
If V