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Debt as an Option Portfolio (cont'd) Debt can also be viewed as a portfolio of riskless debt with a written put option on the

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Debt as an Option Portfolio (cont'd) Debt can also be viewed as a portfolio of riskless debt with a written put option on the firm's assets with a strike price equal to the required debt payment. - - When the firm's assets are worth less than the required debt payment, the owner of the put option will exercise the option and benefit from the difference between the required debt payment and the firm's asset value. This leaves the debt holder with just the assets of the firm. If the firm's value is greater than the required debt payment, the debt holder only receives the required debt payment.

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