A digital default option
A)always pays the par value of a loan if exercised.
B)has a payout that is capped at 80 percent of the par value of the loan.
C)will cause the FI never to lose more than the premium paid to purchase the option.
D)Answers A and C only.
E)Answers A and B only.

Question

Quizplus · Accepted Answer

The statement in option A is correct, as a digital default option pays the par value of the loan if exercised. Option B is incorrect, as the payout of a digital default option can be higher or lower than 80 percent of the par value, depending on the terms of the option contract. Option C is also correct, as the premium paid for the option is the maximum amount that the FI can lose if the option is exercised. Therefore, the correct answer is D.

A Digital Default Option