3.The risk that a government decides to change the terms of a financial contract by which...

3.The risk that a government decides to change the terms of a financial contract by which it borrowed funds is an example of a)operational risk. b)liquidity risk. c)credit risk. d)country (or sovereign) risk.

Expert Solution

The risk that a governmen decides to change the terms of a financial contract by which it borrowed funds is an example of country (sovereign) risk.

The government of a country borrowed funds that means it is a debt to them which they have to repay with interest. They entered into this financial contract where they were provided with funds on credit because they needed money for welfare of their country. Now risk arises as soon as the contract of debt is made.

The risk is of non-payment of funds entirely or non-payment of interest. It means default in payment and not honouring the loan agreement.

Operational risk is loss from failed procedures and erros in system.

Liquidity risk is inability of organisation to meet its short term financial demands because of lack of liquid cash or cash crunch.

Credit risk is risk of default on a debt when the due date arrives.

But Sovereign risk is specially risk of default from government of a country.

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