dyga

It does say "resembles a call option" . The bond holders are not the ones to "pay" on the call option. The market (short-sellers in stock market) do that .

The bondholders provide financing in the form of loans , which sets up the hurdle or "strike" . If the stock rises above the hurdle , the increased market value ( above the strike ) belongs to the shareholders , hence the call option for shareholders.

On the downside , the shareholders are not the ones to pay the short-sellers when the stock falls. The bondholders pay the short-sellers through losses on their loan . This is why it resembles a put option written by bond holders



Edited 1 time(s). Last edit at Wednesday, March 30, 2011 at 11:02AM by janakisri.