Suppose the investor who buys FI's bond issue holds 1,000 bonds with a $1 million face value position. Subsequently a credit downgrade occurs and the bond declines in value to $700. What is the option value? A. $700. B. $300. C. $300,000.
(Note: if protection were purchased on the entire position, the overall payoff would be $300,000 (= $300 × 1,000), less the cost of purchasing the options.)
