Which of the following is NOT a method to manage market risk?

To understand why credit derivatives is the correct answer, it's important to define market risk and how various methods manage it. Market risk refers to the potential for losses in financial investments due to fluctuations in market variables, such as interest rates, equity prices, or currency exchange rates.

Risk budgeting is a method used to allocate risk across different investments in a portfolio to optimize return relative to the levels of risk taken. This process helps in managing market risk by ensuring that the portfolio has a defined risk exposure and that it aligns with the investor's risk tolerance and investment objectives.

Performance stop outs refer to a risk management practice where positions are closed out if they reach a predefined loss threshold. This strategy directly responds to market movements and helps limit potential losses, thus effectively managing market risk.

Liquidity limits are also a form of risk management. They are measures that ensure a position can be exited without significantly impacting the market price. Ensuring sufficient liquidity helps mitigate risks associated with sudden market movements that could cause unfavorable pricing in illiquid assets.

In contrast, credit derivatives are financial instruments used primarily to manage credit risk, which is fundamentally different from market risk. Credit risk involves the possibility of loss due to a borrower's failure to repay a loan or meet contractual obligations. While credit derivatives can