A portfolio manager would like to protect a position of 9 thousand bonds with a par value of $1000 and trading currently at $989 against a rating downgrade of the issuing company. The manager purchases 9 thousand binary credit put options expiring in 6 months at a price of $80.3 each with a strike price set to bond par. These options have a payoff of max(K-V, 0) only in the event of the bond rating on expiration date being below investment grade, where K = strike, and V is market value of bond at expiration.

At expiration, the bonds are indeed rated below investment grade, and are trading at a price of $845.4.

What is the net profit to the manager from buying these put options?

Correct Answer: 668,700