What is a Counterparty Risk?
Counterparty risks are understood to be the type and degree of risks associated with each party in a contractual arrangement. Essentially, the counterparty risk addresses the financial stability of each party involved. Assessing the degree of risk involved with most forms of loans or investment purchases is considered routine, as the expectation is that both parties will be able to honor their obligations. When it comes to financial loans, assessing the counterparty risk is very important for the party extending the loan. By evaluating both the current financial status of the recipient of the loan and his or her projected ability to repay the balance due in full, it is possible to calculate the chances that the loan will go into default. Ideally, a lender will seek to make loans where the amount of this type of counterparty risk is relatively low, and thus presents very little threat of a loss for the loan institution. Investment transactions are another example of how the principle of
