Question

Suppose that you are the manager and sole owner of a highly leveraged company. All the debt will mature in one year. If at that time the value of the company is greater than the face value of the debt, you will pay off the debt. If the value of the company is less than the face value of the debt, you will declare bankruptcy and the debt holders will own the company.

a) Express your position as an option on the value of the company.


b) Express the position of the debt holders in terms of options on the value of the company.


c) What can you do to increase the value of your position?

Answer 1

From my position as an option on the value of the company, the stance or view of the owner is a call option on value of company strike face of debt

Secondly, debt holders have systematically sold a put option value of company strike at face of debt.

Now, to be able to increase or raise the value call option it includes he following, In making sure to raise the value of the company, To boost the unpredictability of the company.

Step-by-step explanation:

Solution

(a) The position of the owner is a call option on value of company strike at face of debt

(b)The debt holders have efficiently sold a put option on value of company strike at face of debt.

(c) To be able to increase the value option call the following are listed below:

• Endeavor or make sure to raise the value of the company
• Boost the volatility of the company.