What is Counterparty Risk?
Counterparty Risk The risk that the other party in a financial transaction may default on contractual obligations, causing financial loss. In portfolio management, it is a key risk factor in derivatives, securities lending, repo, and OTC contracts.
Source: CFA Institute, IFRS Foundation, FASB (GAAP), Basel III Framework
How is “Counterparty Risk” Used in Practice?
Portfolio managers must assess counterparty risk before entering into OTC derivatives to ensure compliance with internal risk limits and regulatory requirements.
Certification Exam Relevance
Who Needs to Know This Term?
- Financial Analysts
- Bankers
- Traders
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What is Counterparty Risk?
The risk that the other party in a financial transaction may default on contractual obligations, causing financial loss. In portfolio management, it is a key risk factor in derivatives, securities lending, repo, and OTC contracts.
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