Which of the following is not considered as credit risk?

Question

BlackTom AI · Accepted Answer

The question asks which item is not considered credit risk. Credit risk refers to the danger that a borrower or counterparty will default on an obligation, fail to meet interest or principal payments, or otherwise not honor a financial contract. It encompasses issues like a borrower's creditworthiness, default probability, and counterparty risk.

The statement provided in the answer field is: "The return of an international investment is affected by the fluctuating foreign exchange rate." This describes exchange rate risk (FX risk) or market risk arising from changes in currency values, which can affect investment returns regardless of whether a borrower defaults. FX risk is not about the debtor's ability or willingness to pay, so it falls outside the scope of credit risk.

Why this helps identify the correct category: FX risk concerns price movements and value impact due to currency fluctuations, not the creditworthiness or default risk of a borrower. This distinction is fundamental in risk management, where credit risk is analyzed separately from market or currency risk.

Why this statement is incorrect as a credit risk characterization if treated as a credit-related risk: It does not describe a default event, delinquencies, credit spread changes due to credit quality, or counterparty failure to honor obligations. Those elements are the core of credit risk, not FX movements.

Because there are no additional answer options provided to contrast, we focus on clarifying the taxonomy: credit risk versus market/FX risk. The highlighted option correctly belongs to a different risk category and is not a description of credit risk.

MFIN8860.01 Summer 2025 Derivatives and Risk Analytics [Jiang] Homework 2

Which of the following is not considered as credit risk?

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