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      Question

      Which of the following is a key factor considered in

      calculating the Loss Given Default (LGD) in credit risk models?
      A The total outstanding debt of the borrower at the time of default Correct Answer Incorrect Answer
      B The probability that the borrower will default on the loan Correct Answer Incorrect Answer
      C The number of recoveries likely to be made post-default, considering collateral and guarantees. Correct Answer Incorrect Answer
      D The borrower’s credit history and repayment track record Correct Answer Incorrect Answer
      E The market value of the borrower’s stock at the time of default Correct Answer Incorrect Answer

      Solution

      Loss Given Default (LGD) refers to the potential loss a lender faces in the event of default, after accounting for the recoveries that can be made through collateral, guarantees, and other mechanisms. LGD is one of the three components that are required for estimation of credit risk under the expected loss model. The other two components are Probability of default (PD) and Exposure at default (EAD).

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