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What Is ‘Counterparty Risk’ and Why Is It Higher in Forward Contracts?

Counterparty risk is the risk of default; it is higher in OTC forward contracts due to the lack of a central guarantor.
Greeks.Live20.11.25

What Is ‘Counterparty Risk’ and Why Is It Higher in Forward Contracts?

Counterparty risk is the risk that one party to a financial contract will fail to fulfill their contractual obligations. This risk is higher in forward contracts because they are private, over-the-counter (OTC) agreements that lack a central clearing house to guarantee performance.

If one party defaults, the other party bears the full loss, unlike in standardized futures contracts where the clearing house mitigates this risk.

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