Counterparty

AAA

DEFINITION of 'Counterparty'

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.

INVESTOPEDIA EXPLAINS '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. Cross-Currency Settlement Risk

    A type of settlement risk in which a party involved in a foreign ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Clearing House

    An agency or separate corporation of a futures exchange responsible ...
  4. Counterparty Risk

    The risk to each party of a contract that the counterparty will ...
  5. Transaction

    1. An agreement between a buyer and a seller to exchange goods, ...
  6. Trade

    A basic economic concept that involves multiple parties participating ...
RELATED FAQS
  1. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  2. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
  3. Can delta be used to calculate price volatility of an option?

    The delta of an option is a component of the Black-Scholes option pricing formula, which provides the implied volatility ... Read Full Answer >>
  4. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  5. What is the difference between a banker's acceptance and a post-dated check?

    Some common financial instruments that speculators use are stocks and financial derivatives. Speculation involves trading ... Read Full Answer >>
  6. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Entrepreneurship

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  3. 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.
  4. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  5. Forex Education

    Forex Tutorial: The Forex Market

    In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market.
  6. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  7. Investing

    What More Volatility Means For Momentum Stocks

    One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds.
  8. Options & Futures

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  9. Investing Basics

    Explaining Currency Swaps

    A swap that involves the exchange of principal and interest in one currency for the same in another currency.
  10. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center