Business, Legal & Accounting Glossary
The risk that the other party in an agreement will default. In an option contract, the risk to the option buyer that the writer will not buy or sell the underlying as agreed. In general, counterparty risk can be reduced by having an organization with extremely good credit act as an intermediary between the two parties.
Counterparty risk refers to the risk of default of one party in a particular transaction.
Credit ratings can be used to evaluate counterparty risk. For example, a party with a AAA credit rating represents a lower counterparty risk than a party with a B credit rating. The lower the counterparty risk, the lower a particular product or commodity will be priced in a transaction. Indeed, although counterparty risk cannot be precisely quantified, in pricing a transaction or an investment product, a counterparty risk premium is often included to reflect the cost of added risk taken by the creditor. Collateral requirement provisions can also be included in transactions to decrease a creditor’s exposure due to counterparty risk. Counterparty risk can also be mitigated by using a credit derivative such as a credit default swap. Another term for counterparty risk is default risk.
You should always try to make sure that you know the counterparty risk before you get too deep in the project.
There was a counterparty risk that we had to be aware of and could not get too involved with because it would hurt in the end.
While the interest rate on the bond deal was attractive, the mutual fund manager was hesitant to buy, as the other side–a startup internet advertiser–represented too much counterparty risk.
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This glossary post was last updated: 22nd November, 2021 | 0 Views.