Wrong-way risk occurs when counterparty credit risk increases at exactly the same time that the exposure to that counterparty increases. If a buyer of a CDS purchases protection on a reference asset from a counterparty, and there is a high positive default correlation between the reference asset and the counterparty, a default of the reference asset will likely coincide with the default of the counterparty. This means the protection fails right when it is needed, which is a classic example of wrong-way risk. Therefore, Option A is correct.

Option B is incorrect because higher asset correlations reduce diversification benefits, typically lowering risk-adjusted returns. Option C is incorrect because Gaussian copulas assume static correlations and fail to effectively capture dynamic correlation risk (tail dependence). Option D is incorrect because correlation risk is highest during periods of market stress when correlations tend to unpredictably spike (contagion), not during benign periods.