From the course: Introduction to Risk Management

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Credit risk: Counterparty

Credit risk: Counterparty

From the course: Introduction to Risk Management

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Credit risk: Counterparty

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- There is another type of credit risk, counterparty credit risk, or just counterparty risk for short. Counterparty credit risk is an issue for banks engaged in financial market transactions with other counterparties. These counterparties could be investment banks, asset managers, hedge funds, and universal banks with investment banking or investment management divisions. In financial markets' transactions, there are two parties, a buyer and a seller. Once the terms of the trade have been agreed by the parties, each party has certain obligations. The buyer has to deliver the specified amount of cash. The seller has to deliver the specified asset, for example, a stock or a bond, in the specified quantity. Counterparty risk is the risk that a bank's counterparty fails to meet its obligation in a financial market's transaction resulting in a financial loss to that bank.

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