[question removed by moderator]
It is the liquidity risk. Why not the credit risk since over-the-counter derivatives are used?
You can use OTC derivatives to hedge credit risk or credit VaR.
But there is credit risk for holding OTC derivatives.
The question states that it’s hedging the payment default risk and adverse security price movements with OTC derivatives. Just leaving liquidity risk unaccounted for which is high for small capitalization bonds compared to large cap.