counterparty risk

Definition

The risk that the other party in an agreement will default. In an option contract, the risk to the option buyer that the writer will not buy or sell the underlying as agreed. In general, counterparty risk can be reduced by having an organization with extremely good credit act as an intermediary between the two parties.

Use counterparty risk in a sentence

You should always try to make sure that you know the counterparty risk before you get toodeep in the project.

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There was a counterparty risk that we had to be aware of and could not get too involved with because it would hurt in the end.

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While the interest rate on the bond deal was attractive, the mutual fund manager was hesitant to buy, as the other side--a startup internet advertiser--represented to much counterparty risk.

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