Question

You are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 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?

   You are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 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?

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 11, Problem 28

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This means that I have the right, but not the obligation, to pay off the debt if the value of the company is greater than the face value of the debt at maturity. (b) The position of the debt holders can be expressed as a put option on the value of the company. Show more…

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You are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 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?

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