Answer: USD 0.00

## Explanation When Paul sells a put option, he is the **option writer** and receives a premium upfront. The counterparty credit exposure refers to the potential loss Paul would face if his counterparty defaults. ### Key Points: - **Paul's position**: Short put option - **Counterparty's position**: Long put option - **Credit exposure**: The amount Paul would lose if the counterparty defaults ### Analysis: 1. **For a short put position**: - Paul receives premium upfront - Paul has an obligation to buy the stock at strike price if exercised - The counterparty has the right, but not obligation, to exercise 2. **Credit exposure calculation**: - Since Paul has already received the premium, he has no credit exposure to the counterparty - If the counterparty defaults, Paul keeps the premium and is released from any future obligation - The credit risk is actually borne by the counterparty (who faces the risk that Paul might not honor the obligation) 3. **Current market conditions**: - Underlying price (USD 98) < Strike price (USD 125) - The put option is in-the-money for the counterparty - However, Paul has already been paid and has no further credit exposure ### Conclusion: Paul's counterparty credit exposure is **USD 0.00** because he has already received the premium payment and has no further financial obligation that would create credit risk exposure to his counterparty. **Correct Answer: A**

Author: LeetQuiz .