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