Suppose that you are the manager and the sole owner of a highly leveraged company. All the debt will mature in one year. If at that time the value of the company is greater than the face value of the debt, you will pay the debt. If the value of the company is less than the face value of the debt, you will declare bankruptcy and the debtholders will own the company.
(a) Express your position as an option on the value of the company.
(b) Express the position of the debtholders in terms of options on the value of the company.
(c) What can you do to increase the value of your position?