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 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