hard · Corporate Credit Analysis

Using the Merton (1974) framework, consider a firm with an asset value V_T and a single zero-coupon debt obligation with face value F. If V_T < F at maturity T, which expression correctly defines the creditor's payoff D_T as a combination of a risk-free position and a short option?

1. D_T = V_T - F
2. D_T = F + max(V_T - F, 0)
3. D_T = V_T - max(V_T - F, 0)
4. D_T = F - max(F - V_T, 0)

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