I need help on the following question.
Suppose that you are the manager and sole owner of ahighly 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?
2 answers
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this was an exam question...i answer for a) long call option b) long put option. But i got it wrong, the instructor won't tell us the answer, he wants us to figure it out ourselves. But i just don't know. Any guidance would be helpful.