Question: In finance, a derivative is a financial asset whose value is determined (derived) from a bundle of various assets, such as mortgages. Suppose a randomly

In finance, a derivative is a financial asset whose value is determined (derived) from a bundle of various assets, such as mortgages. Suppose a randomly selected mortgage has a probability of 0.01 of default.
(a) What is the probability a randomly selected mortgage will not default (that is, pay off)?
(b) What is the probability a bundle of five randomly selected mortgages will not default assuming the likelihood any one mortgage being paid off is independent of the others?
(c) What is the probability the derivative becomes worthless? That is, at least one of the mortgages defaults?
(d) In part (b), we made the assumption that the likelihood of default is independent. Do you believe this is a reasonable assumption? Explain.

Step by Step Solution

★★★★★

3.34 Rating (178 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Using the complementation rule b Assuming that the likelihood of default is independent c Probabi... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

1382-M-S-P(11079).docx

120 KBs Word File

Students Have Also Explored These Related Statistics Questions!

In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset. Consider the following simple derivative. A...

Find the function whose derivative is (10.00)e 5.00x and whose value at x = 0.00 is 10.00.

In Problems 1-3 use f'(x) = to find the derivative at x. 1. s(x) = 2x + 1 2. f(x) = Î±x + Î² 3. r(x) 3x2 + 4 imlf(r + h)f(x)]

In finance, one example of a derivative is a financial asset whose value is determined (derived) from a bundle of various assets, such as mortgages. Suppose a randomly selected mortgage in a certain...

Infinance, one example of a derivative is a financial asset whose value is determined(derived) from a bundle of variousassets, such as mortgages. Suppose a randomly selected mortgage in a certain...

I have a question on Liquidity ratios based on a financial statement. Please open the attachments below. INDEPENDENT AUDITORS' REPORT TO PARLIAMENT AND THE SHAREHOLDER OF SOUTH AFRICAN AIRWAYS SOC...

I have a question on Profitability ratios based on a financial statement. Please open the attachments below. INDEPENDENT AUDITORS' REPORT TO PARLIAMENT AND THE SHAREHOLDER OF SOUTH AFRICAN AIRWAYS...

I have a question on Solvency ratios based on a financial statement. Please open the attachments below. INDEPENDENT AUDITORS' REPORT TO PARLIAMENT AND THE SHAREHOLDER OF SOUTH AFRICAN AIRWAYS SOC...

UESTION ONE (COMPULSORY) A derivative is a financial instrument whose value is derived from the value of another asset, which is known as the underlying. When the price of the underlying changes, the...

Five Forces in the Beauty Products Industry As a $160 billion-a-year global industry, the beauty products industry encompasses makeup, skin and hair care, perfumes, cosmetic surgery, health clubs,...

The following account appears in the ledger after only part of the postings have been completed for October: Work in Process Balance, October 1 ...... $ 42,600 Direct materials ....... 360,000 Direct...

WeWork was one of the most anticipated IPOs of 2 0 1 9 . Initially the company was valued at $ 4 7 billion, but serious concerns from investors led WeWork to cancel its IPO plans. Investors were...

Explain how to use the discount rate to expand the money supply.

Use the results of Problem 17 in Section 14.1 to answer the following questions: (a) Predict the mean annual ROI of all four-year schools whose 2013 cost is $180,000. (b) Construct a 95% confidence...

Use the results of Problem 18 from Section 14.1 to answer the following questions: (a) Predict the mean weight of American black bears with a total length of 154.5 cm. (b) Construct a 95% confidence...

(a) Explain why it does not make sense to construct confidence or prediction intervals based on the least-squares regression equation. (b) Construct a 95% confidence interval for the mean stock...

Income Statement For the Year Ended on December 3 1 \ table [ [ , J&H Corp.,Industry Average ] , [ Net sales,$ 1 5 , 0 0 0 , 0 0 0 , $ 1 8 , 7 5 0 , 0 0 0

a . Construct the current balance sheet for the firm using the projected sales figure. ( Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to...

6. Estimate the value of the stock using two different models using your calculated estimates (you must provide the models used from text or used in class and show your calculations). 7. Estimate the...