Consider a forward contract with a gold producer in which the bank pays the spot price of gold and receives a fixed price. Suppose the price of gold were to decrease. That would worsen the credit quality of the gold producer, since its revenues would decrease, making its business less profitable and viable. It would also increase the value of the forward contract to the bank, since the bank is paying the spot price; therefore, the bank's exposure would increase. The risk the bank faces is often referred to as the ______.

A. credit risk
B. counterparty risk
C. wrong-way risk

Correct Answer: C

Wrong-way risk occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty.