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How Is Credit Risk Related To The Concepts of Adverse Selection and Moral Hazard

Credit risk arises from the possibility that a borrower may default on a loan. Adverse selection and moral hazard relate to credit risk, where adverse selection refers to a borrower having private information about their risk that is unknown to the lender, and moral hazard occurs when a borrower provides misleading information about their assets and liabilities, increasing the lender's risk.

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52 views1 page

How Is Credit Risk Related To The Concepts of Adverse Selection and Moral Hazard

Credit risk arises from the possibility that a borrower may default on a loan. Adverse selection and moral hazard relate to credit risk, where adverse selection refers to a borrower having private information about their risk that is unknown to the lender, and moral hazard occurs when a borrower provides misleading information about their assets and liabilities, increasing the lender's risk.

Uploaded by

Liam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. How is credit risk related to the concepts of adverse selection and moral hazard?

Credit risk is the default risk from a borrow that may not pay the loan and interest amount
back. After a borrow knows their financial condition and ability to repay, two types of risks are
related to credit risk which is a moral hazard and adverse selection. Adverse selection is a state
where a seller knows some information that the buyer does not know. Moral hazard is when a
company or other entity provides misleading information about its assets and liabilities.
Therefore, one party assumes the additional risk that can affect the other side.

Investment analysis: Explain the difference between forward and futures markets.

A future contract is an exchange-traded and is standardized. A forward contract is not an


exchanged trade, and are private agreements between two parties. The difference between
the two is that a futures contract gains or losses from the change in the price of an asset are
realized each day rather than being realized only on the settlement day. Therefore, a futures
contact takes the daily fluctuations of price changes of an asset into account.

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