Question

We can express a firm in terms of a call/put option. In this context, the equity in the firm is like the (a) with its strike price being the face value of debt. From another perspective, stockholders position is equivalent to holding a portfolio of a long
2 position of the (b), a short position of the (c), and a long position of the (d). Which of the following has the correct answers for blanks (a)-(d) in that order?
A. futures on the firm; firm; put option on the firm; risk-free zero-coupon bond
B. put option on the firm; firm; call option on the firm; risk-free zero-coupon bond
C. call option on the firm; firm; put option on the firm; risk-free zero-coupon bond
D. put option on the firm; firm; risk-free zero-coupon bond; call option on the firm
E. call option on the firm; firm; risk-free zero-coupon bond; put option on the firm

Answer 1

Answer:

E. call option on the firm; firm; risk-free zero-coupon bond; put option on the firm

Explanation:

As we know that

If we add the stock price and the put i.e. equivalent to the call and the risk free bond

In an equation form, it can be presented below

Put + stock price = call + PV(risk free bond)

So according to the above equation form, the option E is correct as it fits to the current situation given in the question

Hence, the correct option is E

And, the rest of the options are wrong