If I play Challenge and designate my damage source, can my opponent play a card to reduce might, and does it affect the damage dealt by Challenge?

Ruling: Yes, opponents can play reactions to reduce might before Challenge resolves, and this will affect the damage dealt. The damage dealt by Challenge is determined when it resolves, not when it is played.

Sequence:

• Challenge is played and a damage source is designated
• Opponent can react with a spell to reduce the unit's might
• The reaction resolves first (reducing might)
• Challenge resolves and deals damage based on the current might value

Nuances:

• This interaction works both ways - you can also react to your own Challenge with effects that increase your unit's might before Challenge resolves