A share can be thought of as a call option on the assets of the firm with an exercise price equal to the face value of debt outstanding.

Question

Quizplus · Accepted Answer

A share can be thought of as a call option on the assets of the firm because the shareholders have the right, but not the obligation, to "buy" the firm from the creditors by paying off the debt, which acts as the exercise price. If the firm's assets are worth more than the debt, shareholders will exercise this "option" by ensuring the firm's obligations are met, effectively retaining ownership of the remaining assets.

A Share Can Be Thought of as a Call Option