8008 Exam Dumps | If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 68

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Question 68/125

If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?

A. L = 1 + R

B. R = 1 + L

C. R = 1 / L

D. R = 1 - L

Correct Answer: D

Explanation
When a default occurs, the proportion of the exposure represented by the recovery rate is recovered. For example, if the recovery rate is 40% for a loan, the actual loss in the event of a default would be $60 for a
$100 loan. In other words, the loss given default = 1 - recovery rate. Hence Choice 'd' is the correct answer.
All other choices are incorrect.

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