The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:
A) interest rate risk.
B) credit risk.
C) counterparty risk.
D) clearinghouse risk.

Question

Quizplus · Accepted Answer

Counterparty risk refers to the risk of default by the second party to a financial contract. It is also sometimes referred to as credit risk, but this term is more commonly used to describe the risk associated with the borrower of a loan or the issuer of a bond. Counterparty risk is a significant concern in financial markets, and firms will often take steps to mitigate or manage this risk, such as requiring collateral, using credit derivatives, or conducting credit checks on potential counterparties. Interest rate risk refers to the risk of changes in interest rates affecting the value of a financial instrument, while clearinghouse risk refers to the risk of loss resulting from the failure of a clearinghouse to fulfill its obligations.

The Potential Exposure That Any Individual Firm Bears That the Second