medium · FRM Part 2 Credit Risk
A financial institution holds a repo position with a hedge fund, where the collateral provided by the fund is equity issued by the fund's parent company. If the fund defaults, it is highly likely that the parent company's equity value has also plummeted, reducing the recovery value of the collateral. This represents:
- Convexity risk in mapping.
- General Wrong-Way Risk (WWR).
- Specific Wrong-Way Risk (WWR).
- Specific Market Risk.
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