Suppose the North American Bank has two loans, each of which is due to be repaid one period hence. The cash flows are independent and identically distributed random variables. Each loan will repay $100 to the bank with probability 0.9 and $50 with probability 0.1. However, while North American knows this, prospective investors cannot distinguish this bank’s loan portfolio from that of the Southside City Bank, which has the same number of loans, but each of its loans will repay $100 with probability 0.6 and $50 with probability 0.4. The prior belief of investors is that there is a 0.5 probability that North American has the highervalued portfolio and a 0.5 probability that it has the lower-valued portfolio. Suppose that North American wishes to securitize these loans, and knows that if it does so without credit enhancement, the cost of communicating the true value of its loans to investors is 5% of the true value. The data for this problem are depicted in Figure 11.9 . Explore North American’s securitization alternatives. Assuming that a credit enhancer is available and that the credit enhancer could (at negligible cost) determine the true value of North American’s loan portfolio, what sort of credit enhancement should North American purchase? Assume investors are risk neutral and that the discount rate is zero.