(Please show formula)

A. [2] Describe the model of firm equity as a call option on assets of the firm. What does it mean for this option to be out-the-money?

B. [3] Why were many thrifts insolvent by the early 1980s?

C. [4] Using the equity model in A, and the concept of forbearance, describe and explain the behavior of thrifts, both insolvent and solvent, in the early 1980s.

D. [2] How does securitization help mitigate the problem described in B?

E. [3] Describe how securitization eventually played a role in the creation of the RE bubble of the early- to mid-2000s.