2016-FRR Exam Dumps | A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized

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GARP.2016-FRR.v2024-09-09.q145
Question 48

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Question 48/145

A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

A. Legal risk; market risk; credit risk

B. Market risk; market risk; credit risk

C. Market risk; credit risk; market risk

D. Credit risk, legal risk; market risk

Correct Answer: B

When distinguishing between credit risk and market risk, the nature of the financial instrument and its backing is crucial:
* A $100 loan collateralized with $200 in stock has limited market risk because the collateral's value is higher than the loan amount, providing a cushion against market fluctuations.
* An uncollateralized obligation issued by a large bank linked to the performance of the Nikkei 225 Index has high market risk due to its dependency on the stock market's performance and high credit risk due to the lack of collateral and reliance on the issuer's creditworthiness.

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