Counter Party Risk

Posted in Finance, Accounting and Economics Terms, Total Reads: 1616

Definition: Counter Party Risk

Counter party risk (default risk) is a risk that an organization (or Individual) does not pay when it is supposed to pay.  It arises whenever one entity depends on another to honour the terms of a contract.

For example, X owes money to Y, Here both X and Y have a certain risk. If X does not pay up or Y does not give the promised amount.

As the name suggests, Counterparty Risk applies to both parties.  

Counterparty Risk can be applicable in cases of many financial scenarios like loans, mortgages, bonds, insurance. 

e.g. In a typical Insurance scenario, Mr A pays premium to the insurance company I. So counterparty risk applicable to both A and I.

Case 1

If A does not pay premium at all or on time.

Case 2

If the company I does not pay the amount when needed to Mr A.

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