Q.2680 Find the value of a vulnerable option as a proportion of the value of a default-free option if the probability of default is 6% and the recovery rate is 25%. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Financial Risk Manager Part 2

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Explanation:

The value of a vulnerable option is determined using the following formula:

Value = (1 − PD) × c + PD × RR × c
       = (1 − 0.06) × c + [0.06 × 0.25 × c]
       = 0.955c

Value = (1 − PD) × c + PD × RR × c
       = (1 − 0.06) × c + [0.06 × 0.25 × c]
       = 0.955c

Financial Risk Manager Part 2

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Q.2680 Find the value of a vulnerable option as a proportion of the value of a default-free option if the probability of default is 6% and the recovery rate is 25%.