Hi there,

I have been given an exercise to solve, but I really can't get started despite having tried for a while. The subject is pretty new to me, so if someone could help me a bit, I would really be grateful.

I have 2 companies V and W.

The probability of company V defaulting in 1 year is 10%.

The probability of company W defaulting in 1 year is 15%.

We assume that default correlation is 30%.

Calculate the probability that both company default in 1 year by using bi-variate normal copula.

Since we did a simulation exercise in class, I thought that this was the way to go. However, I ended up nowhere because I just end up having a bunch of simulated default times for both companies, and don't know what to do with them.

Is there an analytical way to solve this problem?

Thank you very much,

DHg