Which type of risk might occur from a failed transaction due to inadequate liquidity?

The correct answer is settlement risk. This type of risk arises when a transaction cannot be completed because one party does not have enough liquidity to fulfill their obligations at the time of settlement. In payment systems, if one side of the transaction fails to provide the necessary funds or assets for the settlement, it can lead to a delay or non-completion of the transaction, resulting in potential losses for the other party involved.

Settlement risk is closely linked to the timing and availability of funds, which is why inadequate liquidity directly contributes to this risk. If a counterparty fails to deliver payment or security as agreed, it can undermine the trust and functionality of the payment system, leading to broader implications for financial stability as well.

In contrast, credit risk pertains to the possibility of loss due to a borrower defaulting on a loan, operational risk relates to failures in internal processes and systems, and counterparty risk focuses on the risk that the other party in a financial transaction will not fulfill their obligations. While these other risks are important in the context of financial transactions, they do not specifically address the failure that arises from inadequate liquidity leading to settlement issues.