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

question 19

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 second-to-default basket option on these two firms? (Assume the discount rate is zero. )

• A)$2.50
• B)$5.50
• C)$11.25
• D)$17.75

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Definitions:

Prostatic Urethra

The portion of the urethra that passes through the prostate gland, carrying urine out of the bladder in males, and semen during ejaculation.

Spongy Urethra

Portion of the male urethra, approximately 15 cm in length, that traverses the corpus spongiosum of the penis.

Real Property

Land and anything permanently attached to it, such as buildings and natural resources, which has legal ownership.

Permanently Attached

Describes an item that is fixed to a property in such a way that removing it would cause damage to the property or the item itself.