December 2019
Beginner
912 pages
28h 36m
English
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CHAPTER 30Other Options
Aims
- To show how a corporate's debt and equity can be valued using options theory.
- To examine different types of equity warrants, which are long-term options on a company's stock.
- To examine quantos which are long-term equity options written on foreign stocks but with the payout in the home currency.
- To show how an equity collar enables a portfolio manager to set an upper and lower limit on the performance of her existing equity portfolio. If this is achieved at zero ‘up-front’ cost then it is known as a zero cost collar or a risk reversal.
In this chapter we show how the debt and equity of a firm can be valued using options theory. Then we examine equity warrants, which are stock options ‘attached to’ bonds. Finally, we discuss how an equity collar places a floor price and a ceiling price on a stock (or stock portfolio).
30.1 CORPORATE EQUITY AND DEBT
Merton (1974) and Black–Scholes (1973) noted that the debt and equity of a firm can be valued using options theory. Suppose a corporation has two sources of finance, debt 
and equity 
. If the value of the firm's assets 
at time t, exceeds the face value of debt (bonds) outstanding then the equity holders ...
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I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.