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

question 20

Multiple Choice

Consider two firms with one-year probabilities of default of $$p _ { 1 } = 0.10$$ and $$p _ { 2 } = 0.05$$ ,respectively.The conditional probability of default in one year is $$\operatorname { Pr } \left[ D _ { 1 } \mid D _ { 2 } \right] = 0.7$$ .What is the probability of a first-to-default basket option that pays $100 if any one firm defaults within a year? (Assume zero discount rates. )

• A)$10.00
• B)$11.50
• C)$14.25
• D)$17.35

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Definitions:

ADEA

The Age Discrimination in Employment Act (ADEA) is a federal law that aims to protect employees and job applicants 40 years of age and older from age-based discrimination in the workplace.

Equal Pay Act

Laws designed to eliminate differences in pay between genders by guaranteeing that both men and women are compensated equally for work of the same value.

Seniority System

An organizational practice where decisions on promotions, layoffs, and other employment actions are made based on the length of an employees’ service.

Merit System

A system used in hiring and promoting individuals based on their abilities and qualifications, rather than on nepotism or patronage.