6.1 - Introduction to Structuring

Question 1

Put Call Parity

Answer 1

Assets - call = risk free bond - put

• > firm’s debt = risk free bond - put
• > firm’s equity = assets + put - risk free bond

Question 2

Morton’s Structural Model

Answer 2

• a firm’s risky debt is the combination of owning risk free debt and writing a put option on the firm’s assets

Question 3

Unlevering Firm equity volatility

Answer 3

σassets ~ σequity * (equity value / asset value)