B is correct. The default correlation between the two credit assets ($\rho_{12}$) is derived as follows:

$$\rho_{12} = \frac{\Phi - \pi^2}{\pi * (1 - \pi)} \tag{1}$$

We then derive the joint default probability of the two credits ($\Phi \cong \pi_{12}$) as follows:

$$\Phi = \rho * \pi * (1 - \pi) + \pi^2 \tag{2}$$

where:

$\rho =$ default correlation between the two credit assets = 0.45
$\pi =$ probability of default of credit Firm 1 = probability of default of credit Firm 2 = 0.0285

Therefore,

$$\Phi = 0.45 * 0.0285 * (1 - 0.0285) + 0.0285^2 = 0.01327 = 1.33\%$$

A is incorrect. 1.25% is the result obtained by ignoring the addition of the last term ($\pi^2$) in the formula (Equation (2) above).

C is incorrect. 2.65% is the incorrect result obtained by multiplying the correct answer in B by 2.

D is incorrect. 2.77% is the result obtained by ignoring the default correlation and ignoring the addition of the last term ($\pi^2$) in the formula (Equation (2) above).