CFA Practice Question

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CFA Practice Question

According to the option analogy, owning a company's debt is equivalent to:

A. owning a risky debt and selling a European put option.
B. owning a riskless debt and selling a European put option.
C. owning a European put option.
Correct Answer: B

It is economically equivalent to owning a risk-less bond that pays K dollars with certainly at time T, and simultaneously selling a European put option on the assets of the company with strike price K and maturity T.

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