Increasing the frequency of marking to market will decrease which type of risk?

The correct choice indicates that increasing the frequency of marking to market will decrease credit risk. Marking to market is the process of adjusting the value of an asset to reflect its current market value, and doing this more frequently allows a firm to monitor its financial positions closely and manage its exposure to potential losses.

When assets are marked to market regularly, it provides a more accurate and timely reflection of an organization’s financial health. This better visibility helps identify deteriorating credit conditions of counterparties earlier, thus enabling proactive measures to mitigate potential losses. By knowing the current value of assets and assessing the creditworthiness of counterparties, firms can manage their risk more effectively and reduce the risk of default, which is a significant component of credit risk.

While increased frequency of marking to market can impact other types of risks, it is particularly effective in reducing credit risk by allowing firms to take timely actions based on updated valuations and changes in counterparty credit quality.