Under the structural model, owning risky debt is equivalent to a long position in a similar risk-free bond and a:
A)
long position in a put option on the assets of the company.
B)
long position in a call option on the assets of the company.
C)
short position in a put option on the assets of the company.
Explanation
Risky debt ownership is economically equivalent to a long position in risk-free bond and a short position in a put option on the assets of the company.
Why is this a short put position and not a long position? If you are long a put isn’t your downside capped?
