The manager of a bond portfolio enters into a European credit spread call option for Company W based on the credit spread widening from its current level of 320 basis points. Suppose that the strike credit spread for the option is 320 basis points and the notional amount is $20 million. Suppose also that the risk factor for this issue is 4.

a. If at the expiration date of this option the credit spread for this issue of Company W is 400 basis points, what is the dollar amount of the payoff?

b. If at the expiration date of this option the credit spread for this issue of Company W is 200 basis points, what is the dollar amount of the payoff?

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