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a. One party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation b. The fair value of a financial asset or liability will fluctuate because of changes in exchange rates c. An entity will encounter difficulty in meeting its obligations associated with financial liabilities d. The fair value of a financial asset or liability will fluctuate because of changes in interest rates
The possibility that a borrower or counterparty will fail to meet obligation araises from banks's dealing or lending to the customers.
the risk of default in the loan by the borrower is called credit risk.
Credit risk is the probability that a borrower will default on any type of debt by failing to make payments to the lender for which he/she has an obligation to do so. This risk belongs to the lender and results in loss of principal and interest, irregular cash flows and incurring of costs of collection. The loss may be complete or partial and can arise in a number of circumstances such as inability of the borrower to repay (bankruptcy) or a country specific risk wherein the sovereign state freezing all foreign currency payments.
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