Explanation:
Joint PD = $4.9% * 2% * 98% + 2%^2 = 0.1360%$, which is a Joint (bivariate) PD implied by asset correlation of 0.25 when the individual PDs are 2.0%.
The solution here is straightforward; this question is mostly to reinforce the concept.
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In the lower panel, because they require a numerical solution, are listed the asset correlations implied by various joint default probabilities. For example, if two credits are uncorrelated, their joint PD = 2.0% * 2.0% = 0.040%; if their asset correlation is 0.05, the joint PD increases to 0.053%. Given a default correlation, rho, of 4.90%, what is the implied asset correlation?
A
0.10
B
0.15
C
0.20
D
0.25