The correct answer is D, which signifies that both the hedge fund and the manufacturer are exposed to wrong-way risk with respect to their counterparty risk to Bank HJK. Wrong-way risk occurs when the exposure to a counterparty increases as the credit quality of that counterparty declines.

For the hedge fund, as interest rates rise, the credit quality of Bank HJK is likely to be negatively impacted due to the potential decline in the credit quality of its borrowers. This would lead to an increase in the credit spread of Bank HJK, which in turn would increase the value of the long put option on Bank PQR that the hedge fund has. Since the performances of Bank HJK and Bank PQR are highly correlated, the decline in Bank HJK's credit quality would coincide with an increase in the hedge fund's exposure to Bank HJK, creating a wrong-way risk.

Similarly, for the manufacturer, the increasing credit spread of Bank HJK due to rising interest rates would also lead to an increase in the credit spread of Bank PQR, as credit spreads of banks in the same market tend to be positively correlated. The manufacturer has a long CDS position on Bank PQR, and as the credit spread of Bank PQR increases, the value of this position increases. However, this increase in value occurs at the same time as the credit quality of Bank HJK is decreasing, which means the manufacturer's exposure to Bank HJK is increasing as its credit quality declines, again constituting wrong-way risk.

This concept is discussed in "The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital" by Jon Gregory, specifically in Chapter 17 on Credit Valuation Adjustment (CVA). The learning objective is to identify examples of wrong-way risk and right-way risk, and to understand and contrast the two types of risk.