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

Multiple Choice

Consider two firms with one-year probabilities of default of $$p _ { 1 } = 0.10$$ and $$p _ { 2 } = 0.05$$ ,respectively.The correlation of default of these two firms is $$\rho = 0.30$$ .What is the price of a $100 notional one-year maturity second-to-default basket option on these two firms? (Assume the discount rate is zero. )

A) $2.50
B) $5.50
C) $11.25
D) $17.75