Cfai topic tests fixed income Falmouth case

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isabellano9

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Hi everybody. .. in the Falmouth case I read in the correction concerning the structural model “a key insight of the structural model is that holding the company’s equity is economically equivalent to owning a European call option on the company’s assets ”
?
In the secret sauce they say the investors are short a put … I’m confused…!
 
Flashback wrote:
Not investors. Debt holders. Read carefully once again.
Click to expand...
Did you manage to understand the essence of that chapter? What is all the fuss about the structural and reduced models?
 
No just applied dummy learning principle. Since this is not my core, doesn’t matter.
 
Structural model says:
  • Owning a co’s equity is like a Long Call on the co’s assets
  • Investing in co’s debt, you can decompose the risky bond into a risk-free bond and a short put on the company’s assets
 
Structural model says:
  • Owning a co’s equity is like a Long Call on the co’s assets
  • Investing in co’s debt, you can decompose the risky bond into a risk-free bond and a short put on the company’s assets
 
Structural model says:
  • Owning a co’s equity is like a Long Call on the co’s assets
  • Investing in co’s debt, you can decompose the risky bond into a risk-free bond and a short put on the company’s assets
 
Triple post! A new record :)
So what is a reduced model? I read about a zero coupon bond somewhere…
 
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