Consider Two Firms with One-Year Probabilities of Default Of $$p _ { 1 } = 0.10$$

question 8

Multiple Choice

Consider two firms with one-year probabilities of default of $$p _ { 1 } = 0.10$$ and $$p _ { 2 } = 0.05$$ ,respectively.The correlation of default of these two firms is $$\rho = 0.30$$ .What is the price of a $100 notional one-year maturity first-to-default basket option on these two firms? (Assume the discount rate is zero. )

• A)$10.00
• B)$12.50
• C)$15.00
• D)$17.50

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