In that post, I showed the gain/loss of the investment fund as follows:

w(P - P

_{b}) if P >= (1-k)P

_{b}

-wP

_{b}if P < (1-k)P

_{b}

where:

P is true price of the loan,

P

_{b}is the purchase price,

(1-k) is ratio of non-recourse loan offered by FDIC (6/7 in case of Geithner plan),

w is ratio of fund money in investment (1/2 in case of Geithner plan; the rest(=1-w) is funded by Treasury).

It also can expressed in option formula as follows:

w{Max(P-P

_{b}, -kP

_{b})}

=w{Max(P-(1-k)P

_{b}, 0)-kP

_{b}}

This is the formula of call option with strike price=-(1-k)P

_{b}and option purchase price=kP

_{b}(See image below).

By applying the above option formula, it can be calculates as

0.5*{(0.5*(100-84*6/7)+0.5*0)-84/7}=1

which corresponds to Nemos's result.

As Nemo showed, the money fund put in is wkP

_{b}=0.5*1/7*84=6. So the fund performance reaches 1/6*100=16.67%.

FDIC gain/loss also can be expressed in option formula as follows:

-Max(0 , (1-k)P

_{b}-P)

(In fact, maximum gain is not zero, as there is interest revenue. Here I ignore it for simplicity)

This is the formula of put option with strike price=-(1-k)P

_{b}(See image below).

The FDIC position is short on this put option, and that "Geithner put" is what enables the floor part of the fund's call option shown above.

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