Equity as an option

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Equity as an Option 

It is said that the equity holders of a levered firm can be thought of as holding a call option on the firm's assets.  Explain what is meant by this statement. 

Putt-call parity -

One thing put-call parity tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three.  For example, how can one replicate a share of stock using a call, a put, and a T-bill? 

 

Insurance as an option -
An insurance policy is considered analogous to an option.  From a policyholder's perspective, what type of option is an insurance policy?  Why?

Reference no: EM13862832

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