The asymmetric return distribution (relatively high probability of anticipated return; lower probability of default) on risky debt exposes the FI to

Question

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The asymmetric return distribution in risky debt exposes the financial institution (FI) to credit risk, which is the risk of default by borrower or counterparty. The relatively high probability of anticipated return implies that the issuer of the debt may not be able to meet its obligations, leading to potential losses for the FI. As such, credit risk is a key concern for FIs that hold risky debt instruments. Technology risk (A), interest rate risk (B), foreign exchange risk (D), and off-balance-sheet risk (E) are all relevant risks for FIs, but they are not directly related to the asymmetric return distribution of risky debt.

The Asymmetric Return Distribution (Relatively High Probability of Anticipated Return;