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Describe at least two ways that option pricing is used in corporate finance (ie, in the...

Describe at least two ways that option pricing is used in corporate finance (ie, in the firm).

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Answer #1

To name a couple of ways, the following come to my mind immediately:

  • Embedded options in Corporate Bonds: Corporate Bonds usually come with a call or put or a convertibility feature embedded in them. These features in corporate bonds are valued based on some recognized option pricing model.
  • Stock Option Plans: Stock option plans are always valued based on option pricing models. This is one major application of option pricing models in Corporate Finance.

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