What is the risk of counterparty?
The risks of the counterparty is understood as the type and degree of risks associated with each party in the contractual arrangement. The risk of the counterparty basically solves the financial stability of each party. The assessment of the degree of risk associated with most forms of loans or investment purchases is considered routine because the expectation is that both sides will be able to honor their duties.
In terms of financial loans, the assessment of the risk of counterparty is very important for the side of the loan. By evaluating the current financial status of the recipient of the loan and its anticipated ability to repay the payable balance in full, it is possible to calculate the chances that the loan will go into the failure. Ideally, the creditor will try to provide loans if the amount of this type of counterparty risk is relatively low, and thus represents a very low threat to the loan institution.
Investment transactions are another example of how the principle of counterparty risk enters the game. With the option contract will be the buyer of the option to determinet stability not only of shares, bond or other options that are purchased; The financial stability of the issuing institution will also be considered. The aim is to ensure that the corporations issuing shares or municipalities issuing bond is strong enough to honor the conditions associated with the transaction. The lower risk of the counterparty means a better investment agreement for the buyer.
different types of financial contracts often include a certain degree of protection and the risk of counterparty for both parties. The Forward Agreement may include provisions that are activated if one of the parties offers some other ways for application. Futures contracts also often contain provisions that help to provide each side of SOMTYP protection if the other party cannot or fails to fulfill the obligation of the contract. While almost any type of transaction will contain a certain degree of counterparty risk, the ideal situation is to have this risk for at least all parties.