What is the probability of each asset paying off

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Reference no: EM131545625

There are three underlying assets in an investment pool. Each has a 6% chance of defaulting. If an asset does not default it pays $1. If it defaults, it pays $0. The first two assets have a 40% correlation between each other. The third asset is uncorrelated with the first 2.

Financial engineers create three products. They have payoffs as follows:

Product 1: Pays $1 if any of the three assets pays, 0 otherwise.

Product 2: Pays $1 if at least two of the three assets pay, 0 otherwise.

Product 3: Pays $1 if all three of the assets pay, 0 otherwise.

What is the probability of each asset paying off?

Please show all of your work

Reference no: EM131545625

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