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:

Error In Billing

Mistakes or inaccuracies in the amount charged on an invoice or billing statement.

Services Rendered

The provision of services to a customer or client, which can be invoiced once the service has been completed.

Subsidiary Ledger

A detailed ledger that contains all the transaction details of a specific account, which rolls up into the general ledger.

Controlling Account

A controlling account is a summary account in the general ledger that consolidates and reflects the total balance of all subsidiary accounts related to it.