Distinguish between Execution Risk and Counterparty Risk in an RFQ Transaction ▴ Learn

Distinguish between Execution Risk and Counterparty Risk in an RFQ Transaction.

Execution risk is the risk that the market maker cannot execute the necessary hedge (buying/selling the underlying) at the expected price, primarily due to slippage or market impact. Counterparty risk is the risk that the other party to the RFQ transaction (the option buyer) will default on their obligation before the contract settles.

Execution risk is a market risk, while counterparty risk is a credit risk.

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