8010 Exam Dumps | All else remaining the same, an increase in the joint probability of default between two obligors causes

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PRMIA.8010.v2022-06-27.q87
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Question 20/87

All else remaining the same, an increase in the joint probability of default between two obligors causes the default correlation between the two to:

A. Increase

B. Decrease

C. Stay the same

D. Cannot be determined from the given information

Correct Answer: A

Explanation
Thedefault correlation between two obligors goes up if the joint probability of default between them increases.
This is intuitive. Also consider the formula for the default correlation between two obligors Default correlation = [P(1,2) - P1 * P2] / P1*(1-P1)*P2*(1-P2); where P(1,2) is the joint probability of default between the two and P1 and P2 are their individual probabilities of default. Obviously, an increase in P(1,2) will cause the default correlation to increase.

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