What option position reproduces the debt profile

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Reference no: EM13214435

a) assuming a 10% risk-free rate and a USD 110.00 debt due in one year, use the bond-spread approach of the Merton model to fill in the spread (in basis points) associated with the indicated level of the SPY investment in the table below: SPY value (USD) Debt value(USD) Spread (basis points) 200 99.53 100 91.82 50 50.00 1 1.00

b) what option position reproduces the debt profile shown above?

c) restate your answer to b) in terms of the debt-holders, the equity holders and the equity as a call option on the assets of the firm: who has sold what to whom?

Reference no: EM13214435

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