The risk that the other party to a derivative or financing transaction defaults before the final settlement, when the position has value to you. Exposure changes as markets move.
Where you will meet it
Counterparty credit risk comes up in 106 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“Credit risk is the loss when a borrower or counterparty fails to pay what it owes.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Credit risk is loss from a borrower or counterparty failing to pay, including a downgrade.”
Country Risk: Determinants, Measures, and Implications FRM Part I · Valuation and risk models
“CDS also carries counterparty risk, especially if the seller is tied to the sovereign.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“Credit risk is the risk of loss because a counterparty fails to meet a contractual obligation in full and on time, or because its ability to do so deteriorates.”
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