FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
A regional bank's risk team classifies the possibility that a corporate borrower fails to make contractual loan payments on time. Which type of financial risk is this?
This is credit risk, because it is the risk of loss from a borrower or counterparty failing to meet its contractual payment obligations. Market risk relates to price changes, liquidity risk to funding or trading ability, and operational risk to internal process, people or system failures.
- AMarket risk
- BCredit riskCorrect
- CLiquidity risk
- DOperational risk
Explanation
Credit risk is the risk of loss arising from a counterparty's failure to meet its contractual obligations. Market risk concerns price movements, liquidity risk concerns the ability to trade or fund, and operational risk concerns failures of processes, people or systems.
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