Counterparty risk is one of the vital conditions that could exist in almost all financial transactions. It is therefore important for you to know how a transaction could fail into a default because counterparty risk could exist in transactions like credit, investment, and even trading. By definition, counterparty risk also refers to default risk. Thus, both individuals and companies are prone to default risk. It happens if they cannot pay the required payments on their debt obligations.
In almost all virtual forms of credit extensions, lenders and investors are subject to this risk. This is because counterparty risk requires both parties to consider the evaluation of the contract. Furthermore, if one party owns a higher default risk, there will be an attachment for premium to compensate the other party. By definition, the name for this term is risk premium, it is the premium addition in the counterparty risk.
It is important to know how to determine the counterparty’s credit risk. Creditors often use credit reports to determine the counterparty’s credit risk in both retail and commercial financial transactions. Creditors could gauge the level of risk by analyzing and monitoring the credit scores of the borrowers. The score of a credit is a numerical value of creditworthiness for both individuals and the companies. This depends on the variables in the credit score.
A person’s credit score could range from 300 to 850. It implied that the higher the credit score the more worthy they are financially as a creditor. The numerical values of the score are actually very simple. The score 550 and below is bad. Poor score ranges from 550 to 649. The fair score is 650 to 699. Good scores range from 700 to 749. Meanwhile, excellent is 750 and above.
