Counterparty risk
The risk of default by the counterparty.
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- Action Taken ReportThe reply an entity must upload on SCORES saying what it did about an investor complaint — it is routed straight to the complainant and starts the clock on their right to ask for a review.
- BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
- BasisThe difference between the spot price and the futures price of an asset — positive when spot exceeds futures, negative when futures exceeds spot, and zero at expiry.
- BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
Where this is taught
- Series VIII · Chapter 1: Basics of Derivativesintroduced here
- Series X-A · Chapter 10: Understanding Derivativesintroduced here
- Series V-D · Chapter 13: Basics of Derivativesintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futures
- Series V-D · Chapter 15: Introduction to Forwards and Futures
- Series VIII · Chapter 10: Sales Practices and Investor Protection Measures
Related terms
- Forward contractA bilateral, over-the-counter agreement between two parties to buy or sell an asset on a fixed future date at a price agreed today — customised to suit them, and binding on both.
- Liquidity riskThe risk of being unable to get out of a position at or near the quoted price — because the contract is bilateral, because the order book is thin, or because volumes dry up near expiry.
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