Which inherent exposure for financial institutions has only a down side?

• A. Liquidity risk
• B. Market risk
• C. Operational risk
• D. Credit risk

Answer: (D)

Credit risk is the exposure that arises when borrowers or counterparties may not fulfill their financial obligations. The key point is that the potential event—default—causes a loss to the lender, potentially wiping out principal and accrued interest and, even with collateral, leading to write-downs or collections costs. This exposure is inherent to lending and represents a downside risk that cannot be turned into a gain simply by the existence of the loan itself. While loans do earn interest if borrowers repay, the risk itself is a loss risk, not a gain opportunity. In contrast, the other risks involve price, funding, or process failures that can be associated with both negative and positive outcomes depending on circumstances, so credit risk best fits the idea of an exposure with a down side only.