Which of the following best describes counterparty risk?
A)the risk that one party defaults on its counterparty risk
B)the risk that one party defaults on its bond coupon payments
C)the risk that one party defaults on its derivatives contract obligations
D)there is no such thing as counterparty risk in derivatives markets

Question

Quizplus · Accepted Answer

Counterparty risk refers to the risk that one party in a financial contract, such as a derivatives contract, fails to meet its obligations. Therefore, option C best describes counterparty risk. Option A refers to default risk, which is a broader concept that encompasses counterparty risk. Option B is specific to bond coupon payments and not applicable to all financial contracts. Option D is incorrect as counterparty risk is a well-established concept in derivatives markets.

Which of the Following Best Describes Counterparty Risk