We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Counterparty Credit Risk?

Jim B.
Updated Feb 02, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Counterparty credit risk is the risk in a financial transaction involving credit that the party which receives the credit will not fulfill its financial obligations. This is the risk incurred by lenders that the repayment of the loan issued will never be made. As lenders can suffer serious financial damage from defaulted loans, they usually take great care to closely analyze their borrowers' ability to repay their loans. In addition, counterparty credit risk comes into play with derivatives, which are investment arrangements between two parties in which the contract calls for a transaction to take place at some point in the future.

Much of the modern business world takes place by one party issuing some form of credit to another. This means that a borrower can make a purchase or receive a loan while making a promise to pay at some later date. Of course, there is a risk that the borrower will never pay back the loan. This is known as counterparty credit risk, which is a significant concern for lenders of all kinds.

There are ways for lenders to mitigate counterparty credit risk. One way is to have a third party on hand that is witness to the loan arrangement and agrees to mediate the loan process. This method of mediating loans is often used in conjunction with collateral, which is something of value that the borrower offers up as security for the loan. If the loan is not repaid, the mediating third party can step in and claim the collateral on behalf of the lender.

Some lenders wish to offer unsecured loans, meaning that no collateral is offered. As such, these lenders must find alternate ways of lessening counterparty credit risk. The most common way to achieve this is to conduct thorough credit checks on potential borrowers. By knowing the past credit history of a specific borrower, a lender can determine the likelihood of that borrower paying back the loan. A credit check may cause the lender to refuse a loan or to offer one with higher interest payments to balance the risk.

In the world of investing, derivatives are investments that most often bring counterparty credit risk into play. This is because derivatives are usually contracts to make a transaction involving some underlying security at a future date, which raises the possibility that one party won't follow through at the predetermined date. Exchange-traded derivatives, which are traded via a regulatory central exchange, lessen this risk for traders. By contrast, derivatives contracts traded in a so-called over-the-counter market have mediating exchange and therefore incur far more credit risk.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.