What risk does "credit risk" refer to?

Credit risk specifically refers to the possibility that a borrower may fail to fulfill their obligation to repay a loan, which can lead to losses for the lender or investor. This type of risk is particularly relevant in the context of loans, bonds, and other forms of credit; lenders assess the creditworthiness of borrowers to determine the likelihood of default. If a borrower defaults, the lender may face financial loss, making it essential for financial institutions to properly evaluate the credit risk before extending credit or making investment decisions.

In contrast, the other risks listed pertain to different aspects of finance. The first choice addresses the risk of losing a competitive market position, which is more aligned with business strategy rather than credit. The third option pertains to market volatility, specifically in relation to stock prices, and does not consider the borrower's ability to repay. The fourth choice involves geopolitical factors or currency fluctuations that affect foreign investments, which are distinct from the concept of credit risk associated with borrower defaults.