The correct answer is D.

Expected loss can be calculated using the following formula:

$\text{LGD} = F \times \text{PD} - V e^{\mu(T)} \times N\left[\frac{\ln(F) - \ln(V) - (\mu)T - 0.5\sigma^2 T}{\sigma \sqrt{T}}\right]$

Where:
N = Cumulative normal distribution
F = face value of zero-coupon bond
V = value of the firm
T = time to maturity
σ = volatility of the firm's value

Thus,

$\text{LGD} = 18 \times 11.025\% - 16 \times e^{11\%(7)} \times N\left[\frac{\ln(18) - \ln(16) - (11\%)7 - 0.5(17\%)^2 7}{(17\%)\sqrt{7}}\right]$

= \`$1.98`45 \text{ million} - \`$1.62`41 \text{ million}

= \`$0.36`04 \text{ million}