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Counterparty Risk
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| FYI - For 2011, Dow up, Dogs of the Dow up more (double digits) |
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Counterparty risk refers to the risk of default of one party in a particular transaction. Credit ratings can be used to evaluate counterparty risk. For example, a party with a AAA credit rating represents a lower counterparty risk than a party with B credit rating. The lower the counterparty risk, the lower a particular product or commodity will be priced in a transaction. Indeed, although counterparty risk cannot be precisely quantified, in pricing a transaction or an investment product, a counterparty risk premium is often included to reflect the cost of added risk taken by the creditor. Collateral requirement provisions can also be included in transactions to decrease a creditor's exposure due to counterparty risk. Counterparty risk can also be mitigated by using a credit derivative such as a credit default swap. Another term for counterparty risk is default risk.
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