Answer: Recovery rate

## Explanation Let's analyze how each factor affects CDS value: **Option A: Recovery Rate** - CORRECT - An increase in recovery rate reduces the value of a CDS - Higher recovery rate means lower loss given default (LGD = 1 - Recovery Rate) - Lower LGD means the protection seller pays less in case of default - Therefore, the CDS protection becomes less valuable **Option B: Expected Exposure** - INCORRECT - An increase in expected exposure would typically increase the value of a CDS - Higher exposure means greater potential losses, making credit protection more valuable **Key Relationship**: - CDS Value ∝ Probability of Default × Loss Given Default - Loss Given Default = 1 - Recovery Rate - Therefore, as Recovery Rate increases, Loss Given Default decreases, reducing CDS value

Author: LeetQuiz Editorial Team