Counterparty risk

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Related to Counterparty risk: Counterparty credit risk

Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.

Counterparty Risk

1. In options, the risk that the option holder will not exercise the option. This may be good if the price moves in the option writer's favor, but counterparty risk is small in that situation.

2. More generally, the risk that one party in a contract will default or otherwise not fulfill his/her obligations. Counterparty risk can be diminished when one party mandates a co-signer or highly-rated guarantor. See also: Intermediated market.

counterparty risk

The risk that a party to a transaction will fail to fulfill its obligations. The term is often applied specifically to swap agreements in which no clearinghouse guarantees the performance of the contract.

Counterparty risk.

Counterparty risk is the risk that the person or institution with whom you have entered a financial contract -- who is a counterparty to the contract -- will default on the obligation and fail to fulfill that side of the contractual agreement.

In other words, counterparty risk is a type of credit risk. Counterparty risk is the greatest in contracts drawn up directly between two parties and least in contracts where an intermediary acts as counterparty.

For example, in the listed derivatives market, the industry's or the exchange's clearinghouse is the counterparty to every purchase or sale of an options or futures contract. That eliminates the possibility that the buyer or seller won't make good on the transaction.

The clearinghouse, in turn, protects itself from risk by requiring market participants to meet margin requirements. In contrast, there is no such protection in the unlisted derivatives market where forwards and swaps are arranged.

References in periodicals archive ?
While not a credit rating bestowed by a third party that independently sees all transactions impacting a particular counterparty's credit, it is an important first step toward improved global visibility and counterparty risk monitoring.
Considering this, iShares has engineered an enhanced platform following a unique model which, coupled with an over collateralised and highly transparent fund structure, helps to significantly minimise counterparty risk for investors.
The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.
The paper also analyzes the structural changes that are fueling growth, including an increase in fully paid/unencumbered assets such as investments in financial products which themselves contain built-in leverage and a heightened awareness among institutional investors of potential counterparty risk.
81% of respondents polled said that the importance of managing counterparty risk had increased over the last two years, with 44% voting for it as their institution's top priority and a further 34% regarding it as very important," said Thomas Aubrey, Managing Director, Fitch Solutions.
Short Term Counterparty Risk Assessment: Prime-2 (cr)
This suite of Fitch proprietary data will allow subscribers to better manage their levels of Credit and Counterparty Risk exposure towards Financial Institutions.
These changes have brought a heightened focus on counterparty risk and highlight the need for firms to adopt active counterparty risk management systems.
Moody's has also assigned Counterparty Risk (CR) assessments in line with its new bank rating methodology.
Fitch Solutions, a division of the Fitch Group, has launched its new Bank Credit Model - a product providing daily Financial Implied Ratings and Implied CDS spreads for 9,500 global banks to help risk managers improve their credit and counterparty risk surveillance, and to meet regulatory and internal compliance requirements.
In a request for comment (RFC) published 8 January, Moody's Investors Service announced that it was proposing to introduce a new bank counterparty risk (CR) rating and methodology, which would represent Moody's opinion on the probability of default on certain senior bank obligations and other contractual commitments.