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

Question

Quizplus · Accepted Answer

A share of stock can indeed be thought of as a call option on the assets of the firm, where the strike price is equal to the face value of the firm's debt. This is because equity holders have a residual claim on the assets of the firm after all debts have been paid off, similar to how a call option gives the holder the right, but not the obligation, to buy an asset at a specified price (the strike price).

A Share of Stock Can Be Thought of as a Call