hard · Quantitative Finance derivatives
In the Merton structural credit model, the debt of a firm is equivalent to which of the following option positions?
- A risk-free bond whose value has no dependency at all on the firm's underlying asset value.
- A long call option position on the firm's assets struck at the face value of the debt.
- A long put option on the firm's assets, giving debt holders protection against bankruptcy.
- Owning the firm's assets and being short a put option on the assets struck at the debt level.
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