Please assist with the following question:
Smart Bank buys a R5 million at-the-money notional call option on the credit spread between the ten-year bond of Max Ltd and that of the government. The credit spread is 150 basis points on the transaction date. The tenor of the option is one year and the premium is 125 basis points. The modified duration of the Max Ltd bond is eight. Calculate the profit/loss of Smart Bank if the credit spread at maturity of the option is 200 basis points.
- Loss of R62 500
- Loss of R200 000
- Profit of R137 500
- Profit of R200 000
- None of the above