A fund owns 10,000 bonds of Alpha Motors with a par value of $1,000 each. To protect against a credit downgrade, the manager buys 6-month options which pay off only if Alpha Motors falls below investment grade. The payoff on an option is the difference between $1,000 and the price of the bond at maturity. The fund manager pays $250,000 to buy 10,000 options.

a. What is the payoff and the profit on the options if, in 6 months, the bond is below investment grade and its price is $850?

b. What is the payoff and the profit on the options if, in 6 months, the bond is investment grade and its price is $950?