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Explanation:
The statement 'The higher the recovery rate from the counterparty, the lower the loss given default amount' accurately describes the relationship between the recovery rate and the loss given default.
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Q.1874 Recovery rate is defined as the percentage of the outstanding amount which can be recovered by the issuer at the time of default. The higher the recovery rate of any instrument, the lesser the associated loss for the issuer. Another variable associated with the recovery rate is loss given default, explained by the equation:
Loss Given Default = 1 - Recovery rate
Which of the following statements correctly describes the relationship between the two?
A
The higher the recovery rate from the counterparty, the lower the loss given default amount.
B
The higher the recovery rate from the counterparty, the higher will be the loss given default amount.
C
The lower the recovery rate from the counterparty, the lower will be the loss given default amount.
D
The recovery rate from the counterparty will always be equal to the loss given default amount.