Counterparty

Loading the player...

What is a 'Counterparty'

A counterparty is the other party that participates in a financial transaction. Every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller that is willing to sell and vice versa.

BREAKING DOWN 'Counterparty'

All trades require some sort of counterparty. For example, the counterparty to the option buyer would be the option writer. One of the risks involved in any transaction is counterparty risk, which is the risk that the counterparty will be unable to fulfill his or her duties. However, in many financial transactions the counterparty is unknown.

RELATED TERMS
  1. Credit Checking

    A check performed on the financial backing of the counterparties ...
  2. Aggregate Risk

    The exposure of a bank, financial institution, or any type of ...
  3. Termination Clause

    A section of a swap contract that describes what will happen ...
  4. Termination Event

    An occurrence that will cause all or part of a swap agreement ...
  5. Inflation Derivatives

    A subclass of derivative that is used by individuals to mitigate ...
  6. Putable Swap

    An exchange of cash flows in which one counterparty makes payments ...
Related Articles
  1. Investing Basics

    Explaining Counterparty Risk

    Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.
  2. Investing Basics

    An Introduction to Wrong Way Risk

    Wrong way risk arises when credit exposure to counterparty during the life of trade is adversely correlated to the counterparty’s credit quality.
  3. Trading Strategies

    Contract for Difference (CFD) Risks

    Contracts for differences are flexible, highly leverageable trading instruments. They offer potentially outsized returns accompanied by noteworthy risks.
  4. Charts & Patterns

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  5. Economics

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
  6. Economics

    What Do Central Counterparty Clearing Houses Do?

    A central counterparty clearing house facilitates trading in European derivatives and equities markets.
  7. Trading Strategies

    Know Your Counterparty When Day Trading

    This can provide insight into how the market is likely to act based on your presence, orders and transactions.
  8. Stock Analysis

    Find The Right Discount Rate Amid Post-2007 Risks

    OIS discounting has become part of standard valuation techniques, in a market in which there is more uncertainty and less proxies for the risk-free rate.
  9. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  10. Investing Basics

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
RELATED FAQS
  1. How do currency swaps work?

    Learn about how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different ... Read Answer >>
  2. Why are OTC (over-the-counter) transactions controversial?

    Learn more about over-the-counter transactions, and why OTC traders are considered riskier than traders working with larger ... Read Answer >>
  3. What legal recourse do I have if the counterparty in a debenture agreement does not ...

    Understand the risks and benefits of debenture agreements, and what legal recourse you have should the other party fail to ... Read Answer >>
  4. Are there derivatives that pay dividends?

    Learn about the various over-the-counter and exchange-traded derivative products that pay dividends without the risk and ... Read Answer >>
  5. What are the benefits of financial netting?

    Learn about the benefits of financial netting, including a reduction in settlement risks between counterparties with multiple ... Read Answer >>
  6. What is the difference between a repurchase agreement and reverse repurchase agreement?

    Learn how a repurchase agreement is a form of collateralized lending and a reverse repurchase agreement is a form of collateralized ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center