Financial Risk Manager Part 1

Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. In this scenario, if the company's projects could potentially violate ethical standards and safety regulations, leading to conflicts with the Food and Drug Administration (FDA), this would be classified as an operational risk. This is because these issues stem from the company's internal operations and processes. It's also worth noting that regulatory compliance is a key aspect of operational risk.

Option B is incorrect. Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. In this scenario, the company's potential conflicts with the FDA do not involve the risk of not receiving payment from a borrower or counterparty, so credit risk does not apply.

Option C is incorrect. Market risk, also called systematic risk, refers to the risk that the value of an investment will decrease due to changes in market factors such as interest rates, stock prices, or exchange rates. The scenario presented doesn't involve these factors.

Option D is incorrect. Liquidity risk is the risk that a company or individual will not be able to meet short-term financial demands. This could occur because the individual or company cannot convert an asset to cash without a substantial loss in value. In the context of the question, the company's potential regulatory issues with the FDA have nothing to do with its ability to quickly convert assets to cash to meet immediate financial obligations.