1. What is Loss Given Default?

Loss Given Default (LGD) is a financial metric used in credit risk analysis to measure the expected loss incurred by a lender in the event of a borrower's default on a loan or other credit obligation.

2. How Does the Calculator Work?

The calculator uses the LGD formula:

Where:

• \( LGD \) — Loss Given Default
• \( Rr \) — Recovery Rate (0 to 1)

Explanation: The formula calculates the percentage of exposure that will be lost if the borrower defaults, based on the expected recovery rate.

3. Importance of LGD Calculation

Details: LGD is a crucial component in credit risk modeling, capital adequacy calculations, and pricing of credit products. It helps financial institutions assess potential losses and set appropriate risk premiums.

4. Using the Calculator

Tips: Enter the recovery rate as a decimal between 0 and 1 (e.g., 0.4 for 40% recovery rate). The calculator will compute the corresponding loss given default.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical range for LGD values?
A: LGD typically ranges from 0% to 100%, with higher values indicating greater potential losses in the event of default.

Q2: How is recovery rate determined?
A: Recovery rate is based on historical data, collateral value, seniority of debt, and economic conditions at the time of default.

Q3: What factors influence LGD?
A: Collateral quality, loan seniority, economic conditions, and legal framework all significantly impact LGD values.

Q4: How is LGD used in risk management?
A: LGD is used in calculating expected loss, determining capital requirements, and setting credit limits and pricing.

Q5: What's the relationship between LGD and PD?
A: LGD (Loss Given Default) and PD (Probability of Default) are the two key components used to calculate Expected Loss (EL = PD × LGD × EAD).