How is credit risk best described?

Credit risk is best described as the possibility of loss from a borrower’s failure to meet obligations. This concept relates specifically to the likelihood that a borrower may default on their debt commitments, such as failing to make timely principal or interest payments. Understanding this risk is vital for lenders, investors, and financial institutions as it helps them assess the creditworthiness of individuals or organizations seeking loans or credit lines.

In financial contexts, credit risk can impact the overall cost of borrowing and the profitability of lending operations. Entities involved in risk management must closely monitor credit risk to develop strategies to mitigate potential losses, such as through due diligence in lending practices, maintaining diversified portfolios, or utilizing credit derivatives.

The other concepts in the question pertain to different types of risks within finance and operations. Operational failure is related to internal processes rather than borrowers' creditworthiness. Losing sensitive information connects to cybersecurity and data privacy concerns. Market price fluctuations describe market risk, which involves changes in market conditions affecting asset values but do not directly relate to the borrower’s ability to fulfill their financial obligations.