Mitigating Trade Credit Risks

What is credit risk assessment?

• Credit risk assessment is the process of analyzing the nutritional value of food products.

• Credit risk assessment is the process of evaluating the stock market performance of an individual or entity.

• Credit risk assessment is the process of determining the weather forecast for a specific region.

• Credit risk assessment is the process of evaluating the creditworthiness of an individual or entity to determine the likelihood of defaulting on a loan or debt.

List three factors considered during credit risk assessment.

• Credit score, employment status, age

• Credit history, income level, debt-to-income ratio

Explain the difference between qualitative and quantitative credit risk assessment.

• Qualitative credit risk assessment is based on numbers, while quantitative credit risk assessment is based on opinions.

• Qualitative credit risk assessment is subjective, while quantitative credit risk assessment is objective.

• Qualitative credit risk assessment is more reliable than quantitative credit risk assessment.

• Quantitative credit risk assessment focuses on qualitative factors.

What are the common credit risk mitigation strategies?

• Risk avoidance, Credit scoring, Hedging

• Diversification, Collateral, Credit Insurance, Guarantees, Netting Agreements

How does diversification help in mitigating credit risk?

• Diversification concentrates investments in a single asset or borrower, increasing the impact of default on the overall portfolio.

• Diversification only works for short-term investments, not long-term ones.

• Diversification has no impact on credit risk.

• Diversification spreads investments across different assets or borrowers, reducing the impact of default by one borrower or asset on the overall portfolio.

Discuss the concept of credit insurance as a credit risk mitigation strategy.

• Credit insurance is a risk management product that protects a lender or borrower against the risk of non-payment due to commercial or political reasons. It helps mitigate credit risk by providing coverage for potential losses resulting from default, insolvency, or other credit events.

• Credit insurance is a form of investment in the stock market

• Credit insurance is a type of health insurance

• Credit insurance only covers losses from natural disasters

What role does collateral play in credit risk mitigation?

• Collateral provides security for the lender in case of borrower default.

• Collateral eliminates the need for credit checks.

• Collateral guarantees the borrower's creditworthiness.

• Collateral increases the interest rate for the borrower.

Explain the importance of credit limits in managing trade credit risks.

• Credit limits are only relevant for small businesses

• Credit limits are crucial in managing trade credit risks as they define the maximum amount a buyer can owe to a seller, reducing the risk of non-payment and financial losses.

• Credit limits are set by buyers, not sellers

• Credit limits have no impact on trade credit risks

How can companies use credit derivatives to mitigate credit risks?

• By ignoring credit risks altogether

• By increasing interest rates on loans

• By reducing the credit rating of the company

• By transferring the risk of default on a loan or bond to another party.

Discuss the impact of economic conditions on credit risk mitigation strategies.

• Market environment does not affect risk management effectiveness

• Economic conditions have a significant impact on credit risk mitigation strategies by influencing borrower financial stability, market environment, and risk management effectiveness.

• Economic conditions have no impact on credit risk mitigation strategies

• Credit risk mitigation strategies are not influenced by borrower financial stability