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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 bundle has a probability of 0.18 of default. (a) What is the probability that a randomly selected mortgage will not default? (b) What is the probability that nine randomly selected mortgages will not default assuming the likelihood any one mortgage being paid off is independent of the others? Note: A derivative might be an investment that only pays when all nine mortgages do not default. (c) What is the probability that the derivative from part (b) becomes worthless? That is, at least one of the mortgages default
Sagot :
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