Credit Risk Management Practice Exam 2025 – Complete All-in-One Guide to Master Your Exam!

Loss given default (LGD) specifically measures the percentage of exposure that is lost when a counterparty defaults on their obligations. It calculates the potential loss to a lender or creditor after accounting for any recoveries that can be made through the liquidation of collateral or other recovery processes. This metric is crucial for evaluating credit risk, as it helps lenders understand the potential financial impact of defaults in their loan portfolios.

While other options touch on related concepts, they do not specifically define what LGD evaluates. The total amount owed by a counterparty upon default pertains more to the outstanding debt rather than the loss incurred, while variance in loan repayments refers to the consistency of payments, not the loss measurement. The recovery rate of past due loans relates to amounts recovered after a default, which is inversely related to LGD. Overall, the correct option accurately reflects the essence of LGD as a key risk management parameter.