What is counterparty risk?

Varying degrees of counterparty risk exist in all financial transactions. Counterparty risk is also known as default risk. Default risk is the chance that companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions.

What is the counterparty risk of derivatives?

Financial institutions essentially face similar counterparty risks. When it gives a loan to its customers/counterparties, that entire amount is subject to counterparty risk. However, when it trades derivatives (like the betting game), the counterparty risk becomes a contingent one that depends on the market value of these contracts.

Which financial products carry counterparty risk?

Financial investment products such as stocks, options, bonds, and derivatives carry counterparty risk. Bonds are rated by agencies, such as Moody’s and Standard and Poor’s, from AAA to junk bond status to gauge the level of counterparty risk. Bonds that carry higher counterparty risk pay higher yields.

Who is a counterparty in a financial transaction?

A counterparty is the person or organisation on the other side of a financial transaction. If you make a financial deal with someone, then the person on the other side of the deal is the counterparty. Here are a few examples of counterparties: What is Counterparty Risk? Alright, so what is Counterparty Risk?