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A risk analyst at a trading firm is evaluating different approaches to mitigate the risks of a portfolio. The analyst assesses the characteristics of credit spreads and focuses on credit spread risk. Which of the following statements is correct?
A
The credit spread is equal to the difference between the actual rate of return of a risky financial instrument and the expected rate of return of that instrument.
B
In a mature financial market, a portfolio's market risk typically includes credit spread risk, interest rate risk, and model risk.
C
Credit derivatives can help to price the credit spread risk for a wide variety of financial instruments that have credit risk exposure.
D
Financial instruments that have credit spread risk are typically illiquid assets.
