The manager of a fixed income portfolio decided to buy a binary credit put option on its holdings of bonds issued by Chesapeake Energy Corp (CEC). The par value of the funds holding of CEC bond is $2 million. The binary put option pays the holder the loss in value if credit downgrade event happens over the next year.

a) assume during the year CEC rating was downgraded and the value of the bond decreased from par to 85% of par. How much would the fund get from the binary option?

b) assume rating change did not occur, but interest rates increased, and the CEC bond value decreased to 90% of par. How much would the fund get from the binary option?