Answer-What are the two specific risk management tools used to minimize Recovery Risk?

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Recovery Risk  This risk is related to recoveries in the event of default, which in turn depends upon various factors such as the quality of guarantee provided by the borrower, and other surrounding circumstances. This risk can be minimized through Collateral and Third-Party Guarantees. However, the existence of this two-risk management tool also carries risk.  Collateral Risk  Although collateral reduces the credit risk it happens only if collateral can be sold at a significant value. The quickness in the realization of collateral depends upon its nature and prevailing market conditions. In the normal course, fixed asset collateral normally carries low realizable value than cash collateral. However, if in a buoyant market say in the case of a property even a fixed asset in the form of a house property carries a higher value. With the use of collateral, the credit risk becomes twofold  Third Party Guarantee Risk  This collateral is a kind of simple transfer of risk on the Guarantor and in case the guarantor defaults then risk again comes back to the lender.

What are the two specific risk management tools used to minimize Recovery Risk?

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