 Options being a value creation tool in the domain of corporate finance, these can be used with reference to the bonds and stocks of a corporate firm. Let take an example in which stock can be used as a call option over the firm. Now in this case we have a firm which has a debt issue to fund a venture undertaken. Now there is an amount of 800 as a principal and interest which is to be due to the bond holders of the firm and this amount will be paid in the next year. We have two scenarios, one is the success scenario and the second is the failure scenario. In success scenario we have two further scenarios where we have very successful game as a venture and in the second success scenario we have a moderated success of our game venture and both the success scenarios the cash flows are $1000 and $850 to the firm as a future cash inflow. Now with these future cash inflows firm can easily pay back the $800 to the investors of the funds that is the debt holders. Now after paying off the debt holders under these two scenarios the leftover cash is $200 and $50 respectively. Now on the second side there is a failure scenario in which we have further two scenarios that is modatively failure scenario and the second is the outright failure scenario. In these two scenarios the cash inflows are $700 and $500 respectively. So paying off them the full amount it leaves nothing for our stock holders of the firm. Now in the graph we see that the success scenario is encircled with color of black and the red circle is with the failure scenario. Now we see that in case of success the board holders are fully paid and then the extra cash flows are going towards the stock holders but in the case of failure board holders are insufficiently paid as a result there is nothing left for the stock holders of the firm. So an insight in this case is that there is a relationship between common stock and the firm and that relationship can be expressed in terms of options. Now let's discuss if the firm is expressed as in terms of a call option then the position of stock holders would be what? Now the firm is treated as an underlying asset in our example upon which the stock is treated as a call option. Now the bond holders can be viewed as the firm's honors and the stock holders now have a call option on the firm with the exercise price of $800. Now for the firm cash flows over $800 the excess amount will be given to the stock holders as they will exercise their option. They would buy this firm from the bond holders against the repayment of $800 and the net cash flows in this particular case will be that in case of very successful games the net cash flow will be $200 goes to the stock holders and in case of moderately success the net cash flow of $50 that will go to the stock holders. So stock holders are going to have surplus amount of cash under both the cases after the repayment to the bond holders their full amount and if the cash flows are less than $800 then in that case the stock holders will not buy this firm as they will not exercise their options and they will walk away from the call. The bond holders will then get the firm firm's rather entire cash flow. So in case the cash flows are less than $800 the stock holders will not exercise their calls and all the cash flows will go to the bond holders. In second scenario we have the firm as an as prex in terms of a call option the position of bond holders. The bond holders position will be that they are owing the firm they have written a call on the firm with the exercise price of $800. If the firms cash flows are below the $800 then all the cash flows will go to the bond holders they will retain the ownership of the firm and if the cash flows are over above $800 then they will get up their whole amount including principal and the interest there on the stock holders will buy the firm and they will purchase it from the bond holders against their due amount of $800 and the surplus cash will also go to the stock holders as a whole.