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Respected sir, I understood valuation of equity using black scholes model but couldn’t understand with regards to debt . This is the statement which i didn’t understood
The Black Scholes model can also be used in debt valuation. The value of a (risky)
bond issued by a company can be calculated as the value of an equivalent risk free
bond minus the value of a put option over the company’s assets.
Therefore, if the value of equity has already been calculated as a call option over the
company’s assets , the value of debt can then be calculated using the put call parity equation.I do not know where you read this, but the valuation of debt using Black Scholes is not in the syllabus. (The valuation of equity can be asked, but even this is rare for the exam).
Thanks for clarifying sir this question was there in Proteus co dec 2011 (adapted question) in kaplan revision kit
I do not have the Kaplan Kit (only the BPP Revision Kit) and so I do not know how they adapted the question.
However I do have the original exam question and it has no mention of options whatsoever.
I can only assume that Kaplan have added something and were trying to be clever 🙂
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