Option pricing theory and credit risk


On the downsidethe shareholders are not the ones to pay the short-sellers when the stock falls. Skip to main content. This is why it resembles a put option written by bond holders. They already pledged the assets of the company in return for the loan. With exam day right around the corner, Schweser's Final Review products are designed to help you finish out your study plan option pricing theory and credit risk walk into the testing center feeling prepared and confident.

Be prepared with Kaplan Schweser. This model is called the Merton Model. AMA Mar 28th, On the downsidethe shareholders are not the ones to pay the short-sellers when the stock falls.

Equity or stock is equal to a call bought on the assets A with face value of liabilities or bonds F as strike price. The market short-sellers in stock market do that. In any case shareholders do not have to put up anything more.

The bondholders pay the short-sellers through losses on their loan. MV Bond is equal to default-free bond plus a put written on the assets A and with the face value of liabilities or bonds F as strike price. They bought a put option at a cost reflecting the size of the assets option pricing theory and credit risk the size of the loan. This model is called the Merton Model. If the stock rises above the hurdlethe increased market value above the strike belongs to the shareholdershence the call option for shareholders.

MV Bond is equal to default-free bond plus a put written on the assets A and with the face value of liabilities or bonds F as strike price. They bought a put option at a cost reflecting the size of the assets and the size of the loan. Equity or stock is equal to a call bought on the assets A with face value of liabilities or bonds F as strike price. Thank you for your response! I am very much confused!

Be prepared with Kaplan Schweser. Thank you for your response! They have the right to exercise the option - which since the call is out of the money - they do not exercise. The market short-sellers in stock market do that. But why the payoffs to the stockholders resemble those of a call option?