The manager of an investment-grade fixed-income fund is concerned about the possibility of a rating downgrade of Alpha Motors, Inc. The funds holding in this company consists of 5,000 bonds with a par value of $1,000 each. The fund manager doesnt want to liquidate the holdings in this bond, and instead decides to purchase a binary credit put option on the bond of Alpha Motors. This option expires in six months and pays the option buyer if the rating of Alpha Motors bond on expiration date is below investment grade (Standard & Poors/Moodys BB/Ba or lower.) The payoff, if any, is the difference between the strike price and the value of the bond at expiration. The fund paid a premium of $130,000 to purchase the option on 5,000 bonds.

A. What would be the payoff and the profit if the rating of Alpha Motors bond on expiration date is below investment grade and the value of the bond is $870?

B What would be the payoff and the profit if the rating of Alpha Motors bond on expiration date is investment grade and the value of the bond is $980?