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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank has lent funds to a manufacturing firm, and the firm fails to pay instalments on the due dates because its cash flows have weakened. Which category of banking risk does this primarily represent?

This is credit risk. Credit risk is the possibility of loss when a borrower or counterparty fails to meet its contractual repayment obligations on time. The firm's default on instalments is exactly that, whereas market, liquidity and operational risks arise from price movements, funding shortfalls and internal failures respectively.

  1. ACredit riskCorrect
  2. BMarket risk
  3. CLiquidity risk
  4. DOperational risk

Explanation

Credit risk is the risk of loss arising from a borrower or counterparty failing to meet its contractual obligations on time. Non-payment of instalments by the borrower is the classic case. Market risk concerns losses from price or rate movements, which is not the trigger here.

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