How do market risks and credit risks differ?

Market risks and credit risks are fundamental concepts in the financial world, and their differentiation is crucial for understanding risk management strategies.

Market risks are primarily concerned with the potential for an investment's value to decrease due to market movements. This encompasses various factors, most notably price fluctuations. These fluctuations can be driven by changes in supply and demand, economic indicators, political events, or shifts in market sentiment. Therefore, option B correctly identifies that market risks arise from price fluctuations, capturing the essence of how market volatility can impact investments.

While other types of risks, such as credit risks, relate to the likelihood of a counterparty defaulting on financial obligations, or liquidity risks pertain to the challenges of buying or selling assets without causing significant price changes, neither of these directly relates to the fluctuations in market price. Operational failures also represent a different category of risk that deals with internal processes and systems rather than market movements. Understanding this distinction helps in effectively implementing risk management practices tailored to the specific nature of the risks involved.