What's the difference between credit risk and counterparty credit risk?

  • As the title reads, what is the difference between credit risk and counterparty credit risk? What are the key differences?

  • user18489

    user18489 Correct answer

    5 years ago

    Credit risk is the risk for holding a risky bond. Counterparty risk is the risk that the counterparty will not be able to meet its contractual obligations if the credit event occur. For example, if you have a bond on AAPL and want to buy CDS to protect in case of bankruptcy (note you buy CDS from another counterparty -i.e. AIG- not the company), then credit risk reflects the possibility AAPL will not fully repay the bond, counterparty risk reflects the risk your counterparty (AIG) will not be able to pay you the amount it owes you if AAPL goes bankrupt.

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Content dated before 7/24/2021 11:53 AM