Hello Ashhad,
when OSPF is used as PE-CE protocol on both VRF sites MP BGP provides for emulation of the so called OSPF superbackbone area.
This is actually done by adding extcommunity attributes to the prefix so that the remote PE node can rebuild an LSA type 3.
Actually, if the OSPF domain-id is the same on both PE nodes the PE node will send an LSA type 3 instead of an LSA type 5.
In this case the OSPF domain is not set explicitly and the OSPF process id is used as OSPF domain id.
All PE routers use OSPF process id 2 so it is correct that the LSA regenerated on PE2 is LSA type 3 inter area.
The OSPF domain id is sent in MP BGP as an extcommunity attribute.
The third PE PE3 will not propagate the PE2's LSA type 3 because it detects the DN bit on the LSA that tells the LSA has been originated by redisribution from MP BGP.
The DN bit in OSPF is a simple but useful loop avoidance tool.
if you check the VPNv4 route using the show ip bgp vpnv4 <prefix> you should see all the BGP attributes associated to the MP NLRI.
The network diagram is correct.
Edit:
if PE2 uses a different OSPF process-id or sets an OSPF domain different from 2, then PE2 would create an LSA type 5 with DN bit set.
Hope to help
Giuseppe
