Counterparty Risk

Counterparty risk is the risk to each party of a contract that the counterparty will not live up to its contractual obligations.  In the financial markets, Counterparty risk is most signficant in the derivatives market, as contracts may last for years and one party may not have the funds reserved to meet its obligation. It is one reason also why Buffett calls derivatives  “weapons of mass destruction”.

Counterparty risk is also known as default risk.

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