What is counter-party risk? And how many people really are aware of the consequences of systemic counter-party risk?
Counterparty risk also know as default risk is the risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk is a risk to both parties and should be considered when evaluating a contract. In most financial contracts, counterparty risk is also known as default risk, a risk that a counter-party will not pay as obligated on a bond, derivative, insurance policy, or other contract. Financial institutions or other transaction counterparties may hedge or take out credit insurance or, particularly in the context of derivatives, require the posting of collateral. Offsetting counterparty risk is not always possible, e.g. because of temporary liquidity issues, malfunctioning of markets or longer-term systemic reasons.
The Next Crisis is the Mother of all Counter-Party Risks (Part 1)
