Understanding Market Risk in Derivatives

Very Easy Derivative Markets And Instruments Derivative Risks

In the world of derivatives, an important concept to understand is derivative risk. Derivative instruments can expose investors to different types of risks, including market risk, credit risk, and operational risk. Each of these risks can impact the performance and valuation of derivatives in various ways. Consider the following statement about derivative risk:

Which of the following options best defines market risk in the context of derivatives?

The risk that a counterparty will fail to fulfill their financial obligations.

The potential for the market price of an asset to change, affecting the value of the derivative.

The risk that an operational failure will disrupt a financial transaction.

Hint

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