Default risk
Core Reading says counterparty risk is the "risk that a counterparty will not honour its obligations".
The ActEd notes say "Counterparty risk is also known as default risk". I guess that answers your question.
Furthermore, Core Reading also says "An example of counterparty risk is settlement risk... when a party pays away cash or delivers assets before the counterparty is known to have performed their part of the deal".
But from the ActEd solution to Subject 305 April 2003 Question 12, it appears that one can be exposed to counterparty risk without being explosed to settlement risk, if there is default on a purchase but no delivery of assets or trade settlement having commenced. The solutions also mention replacement risk -the risk of incurring the costs involved in setting up a replacement deal.
Therefore I think settlement risk is a subset of counterparty risk, and both counterparty risk and replacement risk are subsets of default risk.
Last edited by a moderator: Sep 3, 2008
