What Is Counterparty Risk

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

Counterparty Risk is the risk that an investor is exposed to when taking out any kind of contractual position (CDS, option, future etc.) The risk is that one (or both) of the parties involved will not be able to meet their obligations. For example, in the run-up to the 2008 financial crash, AIG issued many billions of dollars worth of CDS's on CDOs, and then when the CDO's actually defaulted they could not afford to pay so all the buyers of AIG-issued CDS's would have lost money.

Counterparty Risk is also sometimes known as Default Risk and is a serious problem in the global interlinked financial world. All the different financial institutions have links and ties to other institutions, and an issue at one can have knock on effects to many more and this effect can spiral out of control very quickly.

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Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.