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

question 15

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:

Alcoholism

A chronic disease characterized by uncontrolled drinking and a preoccupation with alcohol, significantly affecting one's health, relationships, and responsibilities.

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A disorder of structure or function in a human, animal, or plant, especially one that produces specific signs or symptoms or that affects a specific location and is not simply a direct result of physical injury.

Social Dysfunction

A disruption or breakdown in the normal functioning of a social system, often leading to social problems.

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Experiencing unwanted sexual advances, requests for sexual favors, or other verbal or physical harassment of a sexual nature.