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?Equity as an OptionIt 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?