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Q.5437 For a portfolio comprising two credit assets, rated A- and BBB+, with respective default probabilities of 2.5% and 3.3% for the next year, the joint default probability for both assets is 0.8%. What would be the implied default correlation for the credit portfolio in the upcoming year? | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

The implied default correlation for the two is credit assets is given by:

\rho_{12} = \frac{\pi_{12} - \pi_1 \pi_2}{\sqrt{\pi_1 (1 - \pi_1)} \sqrt{\pi_2 (1 - \pi_2)}}

= \frac{0.8\% - 2.5\% \times 3.3\%}{\sqrt{2.5\%(1 - 2.5\%)} \times \sqrt{3.3\%(1 - 3.3\%)}} = 0.25726 = 25.73\%

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Q.5437 For a portfolio comprising two credit assets, rated A- and BBB+, with respective default probabilities of 2.5% and 3.3% for the next year, the joint default probability for both assets is 0.8%. What would be the implied default correlation for the credit portfolio in the upcoming year?