What is "credit risk"?

Credit risk refers to the potential that a borrower may fail to meet their obligations in accordance with agreed terms, particularly the inability to repay a loan or meet contractual debt obligations. This risk is especially pertinent to banks and lenders who provide financing — they face the possibility that a borrower may default, leading to financial losses. Credit risk can arise from various lending activities, including personal loans, mortgages, and corporate bonds.

In contrast, fluctuations in stock prices pertain to market risk, while losing investments in real estate relates to property market risk. Adverse impacts from currency exchange rates refer to currency risk, which affects international transactions and investments. Therefore, the definition of credit risk clearly centers on borrower reliability and the implications of default on loans, making this answer the most accurate representation of the term.