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  3. alex is a major shareholder of a leveraged company

Alex is a major shareholder of a leveraged Company X, holding 30% of the total...

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Accounting

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Alex is a major shareholder of a leveraged Company X, holding 30% of the total shares. Alex also shorts 30% of the total debt of Company X. All the debt of Company X xill mature in one year. If at that time the value of the company is greater than the face value of the debt. Company X will pay off the debt. If the value of the company is less than the face value of the debt, company will declare bankruptcy and the debtholders will own the company. Suppose V is the value of the company at the end of one yearl and D is the face value of the debt: a) Express Alex's positions (share holding and debt holding separately) in terms of option on the value of Company X. (3 marks) b) What will happen to the value of Alex's aggregate position when the volatility of V increases? Why? (2 marks)

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