Question

During a review of the credit book, you want to do a spot check of the loss given default (LGD) assumptions and calculations associated with credit default swaps. Of the following, which is the correct definition of LGD? [2]
(a) Loss given default is the difference between recovery and exposure.

(b) The LGD is known in advance because it is a function of exposure to the defaulting party but the probability of default is not known with certainty.

(c) LGD is the probability of default divided by the expected loss.

(d) LGD is the exposure minus recovery

Answer 1