Search Investopedia

Counterparty Risk

Filed Under » , ,
Dictionary Says

Definition of 'Counterparty Risk'

The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract.

In most financial contracts, counterparty risk is also known as "default risk".
Investopedia Says

Investopedia explains 'Counterparty Risk'

Because A is a counterparty to B and B is a counterparty to A both are exposed to this risk. For example if Joe agrees to lends funds to Mike up to a certain amount, there is an expectation that Joe will provide the cash, and Mike will pay those funds back. There is still the counterparty risk assumed by them both. Mike might default on the loan and not pay Joe back or Joe might stop providing the agreed upon funds.

Related Definitions

  •

    Clearing House

    An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and ...
    Read More »

  • Moral Hazard

    The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an ...
    Read More »

  • Political Risk

    The risk that an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in ...
    Read More »

    • Risk

      The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk ...
      Read More »

    • Default Risk

      The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all ...
      Read More »

    • Default

      1. The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are ...
      Read More »

    • 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 ...
      Read More »

    • Too Big To Fail

      The idea that a business has become so large and ingrained in the economy that a government will provide assistance to prevent its failure. "Too big to fail" describes the belief that if ...
      Read More »

    • Credit Checking

      A check performed on the financial backing of the counterparties in a forex transaction. This credit check ensures that both parties have the means necessary to cover their leveraged ...
      Read More »

    • Cross-Currency Settlement Risk

      A type of settlement risk in which a party involved in a foreign exchange transaction remits the currency it has sold, but does not receive the currency it has bought. In cross-currency ...
      Read More »

Articles Of Interest

Sponsored links
Hot Definitions
Partner Links
Suggested Definitions