Which of the following risks is associated with derivative instruments?

Derivative instruments are complex financial contracts whose value is derived from the value of an underlying asset, index, or rate. They can expose investors and institutions to various types of risks, and understanding these risks is crucial for assessing the potential impact on financial statements and overall financial health.

Credit risk is present with derivative instruments because these contracts involve a counterparty that may default on its obligations. If the counterparty fails to fulfill its part of the agreement, the party on the other side of the transaction could incur losses.

Market risk is also a significant concern for derivatives, as their values can fluctuate based on changes in market conditions, such as interest rates, currency exchange rates, or equity prices. This risk reflects the potential for financial losses due to adverse movements in the market environment that can affect the asset or derivative’s value.

Legal risk is another important aspect since derivatives are often subject to complicated regulations, and disputes over contract terms can arise. Changes in laws or regulations can affect the legality or enforceability of these instruments, leading to additional risk exposure.

Given that each of these risks—credit, market, and legal—is associated with the use of derivative instruments, the correct choice encompasses all of them. This comprehensive understanding of the risks involved highlights the necessity for rigorous risk