Trading counterparty risk
Counterparty risk is an often-forgotten risk management matter in option trading. Counterparty risk is the risk that the seller of an option will not sell when the buyer chooses to exercise the option. You buy a put on IBM believing it will go down and it does, substantially. Counterparty risk refers to the possibility that one party in a particular transaction, could potentially end up defaulting. When used in the context of FX, counterparty risk typically refers to the possibility that the brokerage or trading venue used by a trader could default or collapse, leading to significant losses for the trader. Counterparty credit risk for ABC is the uncertainty that its counterparty XYZ is unable to meet the contractual obligations and will default before paying the money back. If XYZ defaults, ABC will