Current credit risk is low when the probability of default is low. However, because circumstances can change, the current credit risk is not fixed but can fluctuate over time.
Kaplan seems to say no… they think…
Current credit risk is defined as any immediate cash flow due to be received. It essentially is an immediate worst case loss and does not consider probability of default. It is binary; a cash flow is due to be received now or it is not.
However, I disagree for two reasons, one credit risk can fluctuate over time given market values of positions change, thus the credit risk changes.
Second, CFA text is a little blurry on this one one. They say the definition of credit risk does define a binary risk of loss due to default risk. However it goes not to say credit risk is assessed in a number of ways such as pricing, quality of issuer, credit scores, rating agencies etc.
So my view is that credit risk can be fluctuate and be assesed such as low or high depending on information.
You are confusing CURRENT credit risk with POTENTIAL credit risk.
Current credit risk is for settlement NOW. It is binary.
Potential credit risk is anytime you are owed something, at some point in the future, with a current positive market value owed to you (i.e. A long European option position that is in the money to be exercised at a later)
Stick to these two points and you will be able to handle any question
Credit risk in the CFA curriculum (and testing) is used in the context of exposure at loss if/when default. They do not dig deeper into credit ratings. If you are owed money on a transaction in the future, that is your credit risk. It doesn’t matter if the counter-party is Bill Gates, the credit risk is amount of loss in case of default.