The correct answer is A. This is due to the concept of wrong-way risk, which refers to the increased likelihood of a counterparty defaulting when the value of the outstanding derivatives is negative for the counterparty and positive for the bank. This correlation between the counterparty's default probability and the bank's exposure at default is what makes option A correct.

Option B is incorrect because the loss given default is positively correlated with the probability of default, meaning that as the likelihood of default increases, so does the expected loss if default occurs. The recovery rate, which is the amount recovered from a defaulted loan, is negatively correlated with the probability of default, but this is not what option B states.

Option C is incorrect because banks are required to make both through-the-cycle and point-in-time estimates of the probability of default, not the loss given default. These estimates are necessary to comply with regulatory requirements and accounting standards.

Option D is incorrect because, for a line of credit, the exposure at default (EAD) is typically estimated conservatively as the customer's borrowing limit, rather than the current exposure or the amount currently drawn down. This approach provides a more cautious estimate of potential losses in the event of default.