Explanation:
The joint default probability is given by the formula:
Given and ,
0.2`% = \rho_{12}\sqrt{0.003(1 - 0.003)}\sqrt{0.004(1 - 0.004)} + 0.003 \times 0.004
\Rightarrow \rho_{12} = 0.5774 = 57.59%
Ultimate access to all questions.
No comments yet.
Q.1832 A pair of credits with BBB- and BBB+ ratings have default probabilities of 0.003 and 0.004, respectively. If the credits are correlated, what is the maximum allowed value of default correlation such that a portfolio composed of only two of these credits has a default probability of 0.2%?
A
54.28%
B
58.28%
C
55.59%
D
57.59%