Indicate which of the following statements about credit risk is (are) false:

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statements about credit risk are false, and provides three options A, B, and C to evaluate.
Option A: 'Because credit losses occur often, it is easy to assess the probability of a credit loss.' This is misleading. In reality, credit losses are not frequent enough to be easily quantified, and the probability of a credit loss is typically uncertain and dependent on a range of factors such as borrower credit quality, collateral, macro conditions, and exposure at default. The claim that it’s easy to assess probability ignores the inherent uncertainty and model risk involved in credit risk assessment.
Option B: 'One element of credit risk is the possibility that the counterparty to a contract will default on an obligation to another (i.e., third) party.' This is a correct characterization of credit risk in many contexts. Credit risk can arise when a counterparty defaults on obligations to any party, including a third party, and such default risk is a fundamental component of credit risk management. The statement aligns with the broader view that credit risk extends beyond direct exposure to a single counterparty and includes potential spillovers to others.
Option C: 'Like the buyer of a European-style option, the buyer of an American-style option faces no current credit risk until the expiration of the option.' This is incorrect. American-style options can be exercised at any time before expiration, meaning the option holder may be exposed to credit risk of the writer (or the counterparty) throughout the life of the option, not only at expiration. Moreover, even if options are margined or centrally cleared in some markets, residual credit risk considerations persist during the life of the contract, so the blanket claim of 'no current credit risk until expiration' is false.
In summary, A is false due to overconfident assessment of credit-loss probability; B is true as it captures counterparty default risk to third parties; C is false because credit risk can be present during the life of an American-style option, not exclusively at expiration.

BU.232.750.51.FA25 Final Exam Fall 2025- Requires Respondus LockDown Browser

Indicate which of the following statements about credit risk is (are) false:

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