One year ago an investor purchased Bond 2, a $ 5 million three year senior unsecured bond issued by company Alpha. At the same time, he purchased a $5 million CDS, for which the reference obligation is Bond 1 issued by Alpha. After one year, Alpha filed for bankruptcy. At that time its three series of bonds outstanding were the following.

Bond 1: five-year senior unsecured bond trading for 35% of par. Bond 2: two-year senior unsecured bond trading for 15% of par. Bond 3: five-year subordinated bond trading for 7% of par.

Which of the following is correct?

The investor would prefer a cash settlement on the credit protection because he can earn $6,000,000 on his position

To receive the a payout on credit protecion, the investor must return Bond 2 to the CDS seller.

The investor is indifferent between cash settlement and physical settlement of the CDS contract.

None of the other answers are correct.

The investor would prefer a cash settlement on the credit protection because he can earn $6,400,000 on his position