Understanding Counterparty Risk in Derivatives

Easy Derivative Markets And Instruments Derivative Risks

Derivatives are financial instruments whose value is derived from an underlying asset. Investors use derivatives for various reasons, including hedging against risk and speculation. However, derivatives also carry significant risks that must be managed carefully.

One of the major risks associated with derivatives is the risk of counterparty default. This risk arises when the other party in a derivative contract fails to fulfill their obligations. Understanding the implications of this risk is crucial for any investor operating in derivative markets.

Which of the following best describes counterparty risk in the context of derivatives?

The risk that the derivative will not move in the expected direction.

The risk that the party on the opposite side of the derivative contract will default on their obligations.

The risk associated with the fluctuations in the underlying asset's price.

Hint

Submitted10.2K

Correct6.1K

% Correct59%