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    Question

    The risk that the other party in an agreement will default, is called? 

    A People Risk Correct Answer Incorrect Answer
    B System Risk Correct Answer Incorrect Answer
    C Parallel Risk Correct Answer Incorrect Answer
    D Market Risk Correct Answer Incorrect Answer
    E Counterparty Risk Correct Answer Incorrect Answer

    Solution

    Counterparty Risk arises if parties do not discharge their obligations when due. This has two component - replacement cost risk prior to settlement and principal risk during settlement. The replacement cost risk arises from the failure of one of the parties to transaction. The principal risk arises if a party discharges his obligations but the counterparty defaults.

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