Question: (a) Equity can be viewed as a call option on the assets of a company. Explain this statement and its implication for equity and debt

(a) Equity can be viewed as a call option on the assets of a company. Explain this statement and its implication for equity and debt holders. (30 marks)

(b) By describing the mechanics of a Credit Default Swap (CDS) explain how it can be used to address credit risk. Use an example to illustrate your explanation. (40 marks)

(c) An appropriately structured CDS can be used to eliminate risk. Discuss the extent to which you agree with this statement. (30 marks)

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