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Suppose a fixed income portfolio manager buys a risky bond issue with a face amount of $100 million that matures in one year. To hedge the credit risk that the issuer of the debt will not pay the full amount, the debt holder buys a credit default put on the value of the issuing firm. What are the payoffs for holding a risky bond and the credit default put, if the value of the risky firm is $80 million? The risky debt payoff is: A. $80 million and the credit default put payoff is $0 because it is out-of-the money. B. $80 million and the credit default put payoff is $20 million. C. $20 million and the credit default put payoff is $80 million. D. $100 million and the credit default put payoff is $20 million. |