A digital default option is
A)an option that pays the par value of a loan in the event of default.
B)a call option whose payoff increases as a yield spread increases above a stated exercise spread.
C)a call option on the loss ratio incurred in writing catastrophe insurance with a capped (or maximum) payout.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

A digital default option is a call option on the loss ratio incurred in writing catastrophe insurance with a capped (or maximum) payout.

A Digital Default Option Is