I am trying to calculate Loss Given Default including both collateral and recovery rate but I haven't found a formula yet to incorporate both.

formulas I've come across:

  • LGD (as percentage) = 1 - (Potential Sale Proceeds / Outstanding Debt)
  • LGD (in dollars) = Exposure at Risk (EAD) * (1 - Recovery Rate)

My initial thought would be to factor RR into Potential Sale Proceeds such as:

LGD (as percentage) = 1 - (Potential Sale Proceeds * Recovery Rate/ Outstanding Debt)

Is there a standard way to achieve this? If not what is the best way to combine these two in practice.



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