Counterparty Risk

Counterparty risk is the possibility that the person or entity you're doing a financial deal with might not fulfill their obligations. For example, if you lend money or enter into a contract, there's a chance the other party could default—meaning they might not pay back or deliver as agreed. This risk is important in banking, investing, and trading, as it can lead to financial losses. Managing counterparty risk involves assessing the credibility of the other party and sometimes using safeguards like collateral or guarantees to reduce potential losses.