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I am really confused about how to work out the following.

Consider two loans A and B with the same probability of default p(either 0 or 1) in this case p or (1-p) and a default correlation r. (a) Show that the conditional default probability of loan A given that loan B defaults is p + r(1 - p):

Answer : I have tried the following

Create a table B 0 1 A 0 (1-p)^2 pr(1-p) 1 r p(1-p) p^2

But I cant show the proof, How to incorporate the r(correlation) to expectation?

Thanks,

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  • $\begingroup$ If you want people that don't know what "probability of default" is, then I suggest you define this in your question. $\endgroup$ – Bobson Dugnutt Mar 12 '17 at 18:24
  • $\begingroup$ I did it :D No need to answer $\endgroup$ – Silent pain Mar 12 '17 at 18:51

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