UNDERSTANDING COUNTERPARTY RISK IN FINANCIAL MARKETS

Counterparty risk is the risk that one party in a financial transaction will default on their obligations to the other party.

Counterparty risk is prevalent in derivatives trading, where parties enter into contracts that depend on the performance of an underlying asset.

Credit risk and market risk are two types of counterparty risk that investors should be aware of.

Credit risk is the risk that a counterparty will default on their obligations due to financial distress or bankruptcy.

Market risk is the risk that a counterparty will default on their obligations due to adverse market conditions.

Investors can mitigate counterparty risk by diversifying their investments, using collateral, and monitoring their counterparties' creditworthiness.

Counterparty risk is an essential consideration for investors in financial markets, and understanding its intricacies is crucial for making informed investment decisions.