Understanding Counterparty Risk in Derivatives

Easy Derivative Markets And Instruments Derivative Risks

In the context of derivative instruments, it is essential to understand the different types of risks associated with these financial products. One crucial aspect is the risk of loss that a market participant could face if a counterparty defaults on their obligation. This risk is known as counterparty risk, but there are other risks involved with derivatives as well. Which of the following best describes the risks specifically associated with derivatives?

Counterparty risk is the risk that arises from the potential default of the party involved in a financial transaction.

Liquidity risk is the risk that arises due to the uncertainty of asset prices in volatile markets.

Market risk is the risk of losses due to adverse changes in market prices.

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