Counterparty risk is
A) present only with exchange-traded options.
B) based on the notional amount of the contract.
C) the risk of loss if the other party to a financial contract fails to honor its obligation.
D) eliminated by the use of insurance funds.

Question

Quizplus · Accepted Answer

Counterparty risk is the risk that the other party in a financial contract may fail to fulfill their obligations, resulting in a potential loss to the other party. It is present in both over-the-counter (OTC) and exchange-traded derivatives, and is not eliminated by insurance funds. The notional amount of the contract is relevant to the size of the potential loss, but is not the defining characteristic of counterparty risk.

Counterparty Risk Is