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CMA Final · Risk Management in Banking and Insurance · Credit Risk Management

In the context of credit risk, 'loss given default' (LGD) is best described as:

Loss given default is the proportion of the exposure expected to be lost if a borrower defaults, after allowing for recoveries from collateral and other sources. It is distinct from probability of default, which measures likelihood, and exposure at default, which measures the amount outstanding.

  1. AThe probability that a borrower will fail to meet obligations within one year
  2. BThe proportion of the exposure that is expected to be lost if default occurs, after recoveriesCorrect
  3. CThe amount outstanding on the borrower's account on the date of default
  4. DThe difference between the market yield on a loan and the risk-free rate

Explanation

LGD measures the share of exposure not recovered after default, net of collateral and recovery costs. The first option describes probability of default, and the third describes exposure at default. The fourth describes a credit spread.

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