Consider Two Firms, Each of Which Has a Distance-To-Default of 2

question 22

Multiple Choice

Consider two firms, each of which has a distance-to-default of 2. The correlation of default of the two firms is $\rho = 0.5$ . Assuming bivariate normality, what is the value of a $100 notional first-to-default basket option on these two firms, if the discount rate is zero?

• A) $1
• B) $2
• C) $3
• D) $4

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