Counterparty risk

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Related to Counterparty Risks: 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 ?
XYZ managers decided that they needed a new approach to quantifying and pricing counterparty risk.
As a result of all these developments, many companies have recognized that counterparty risk is not a one-way street in derivatives trades, and that they need to actively manage their trading relationships from both a pricing and a counterparty risk management perspective.
Increasingly over the last period, we have seen more clients asking questions regarding counterparty risk," says Tim Wildenberg, head of electronic trading, EMEA, at Citi Equities.
While managing counterparty risk is a mix of policy, systems and market intelligence, buy-siders still need to be able to expect the unexpected.
All parties, including the underlying hedge funds, are exposed to counterparty risk.
The introduction of a CCP in the settlement chain substantially reduces counterparty risk between the prime and executing brokers and thereby also substantially reduces the exposure of the hedge fund to their executing brokers.
In January, twelve major internationally active banks and securities firms formed the Counterparty Risk Management Policy Group.
One of the most difficult and important issues to be addressed by the Counterparty Risk Management Policy Group involves the exchange of information between creditors and counterparties.
CVAs and the market risk management of counterparty risks is key under the ruling of FAS 157 and IAS 39
Chapters 6 to 10 cover topics related to the pricing and hedging of counterparty risks and of collateral arrangements.
Because both trading and clearing (settlement of claims) occur bilaterally rather than centrally on a regulated marketplace, substantial counterparty risks arise between the parties.
Texla"), an independent natural gas marketing company, has subscribed to Rapid Ratings' suite of products for measuring corporate counterparty risk exposures.