Wrong-way risk occurs when the exposure to a counterparty increases exactly when the counterparty's probability of default increases.

1. Hedge Fund: The hedge fund bought put options on Bank PQR stock from Bank HJK. The hedge fund's exposure to Bank HJK increases when Bank PQR's stock price declines (i.e., the put options are in-the-money). Since Bank HJK and Bank PQR are highly correlated, a decline in Bank PQR's stock is likely to occur at the same time Bank HJK experiences credit deterioration and an increased risk of default. Thus, the exposure increases as the counterparty default risk increases, representing wrong-way risk.
2. Manufacturer: The manufacturer bought CDS protection on Bank PQR from Bank HJK. The manufacturer's exposure to Bank HJK spikes if Bank PQR defaults (triggering the CDS payout). Given their high correlation, if Bank PQR defaults, Bank HJK is also highly likely to face severe financial distress or default at the same time. Thus, the exposure sharply increases alongside the counterparty's default probability, which is a classic example of wrong-way risk. Both the hedge fund and the manufacturer face wrong-way risk with respect to Bank HJK.