When does counterparty risk arise?
A)When the spot price increases.
B)When the investor takes a naked position.
C)When the speculator loses to the counter party.
D)When the counterparty defaults.

Question

When does counterparty risk arise?
A)When the spot price increases.
B)When the investor takes a naked position.
C)When the speculator loses to the counter party.
D)When the counterparty defaults.

Quizplus · Accepted Answer

Counterparty risk arises when the counterparty (the other party in a financial transaction) fails to fulfill their obligations, such as defaulting on a payment. Therefore, option D is the correct choice. Option A is incorrect as changes in spot prices do not necessarily relate to counterparty risk. Option B is partially correct, as taking a naked position (a position taken without hedging) can increase the risk of counterparty default, but it is not the only factor that contributes to counterparty risk. Option C is incorrect as losing to the counterparty does not represent counterparty risk, but rather financial losses resulting from a speculative position.

When Does Counterparty Risk Arise