New Study Reveals How to Manage Risk in Financial Transactions
Counterparty risk is the risk of a trading partner not being able to fulfill a financial contract. It mainly comes from over-the-counter trades like derivatives. This risk combines market risk and credit risk. Banks use credit limits to control this risk by limiting exposure to each trading partner based on their likelihood of defaulting. Credit value adjustment (CVA) and credit limits work together to manage counterparty risk effectively.