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

question 14

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 second-to-default basket option that pays $100 if any both firms default within a year? (Assume zero discount rates. )

• A)$0.50
• B)$1.50
• C)$2.50
• D)$3.50

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Definitions:

Proton Acceptor

A substance that receives hydrogen ions in a chemical reaction.

Proton Donor

A substance that can release (donate) a proton (H+ ion) in a chemical reaction, typically an acid in a chemical context.

Base

A substance that can accept hydrogen ions (protons) or more generally, donate electron pairs in reactions.

Osmolal Solution

A solution characterized by its osmolality, which is a measure of the concentration of solutes per kilogram of solvent.