You are a sales person in a bank and are about to sell a structured note to a non-professional customer. Before finalizing the transaction you remember to double-check the customer's charter. You learn that the customer is not allowed to invest in structured products. The risk you have avoided is most likely to be classified as:
A) credit risk
B) liquidity risk
C) legal risk
D) refinancing risk

Question

Quizplus · Accepted Answer

The risk that has been avoided is legal risk as the customer's charter prohibits investment in structured products. This would make the transaction illegal and subject the bank to potential legal consequences. Credit risk relates to the risk of the borrower defaulting on their debt obligations. Liquidity risk relates to the ability to quickly convert an asset into cash without a significant loss in value. Refinancing risk relates to the risk of not being able to secure funding at the same or lower cost when a loan or debt security comes due for refinancing.

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