Question

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

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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