What Is the Difference between Credit Risk and Counterparty Risk?
Credit risk is the general risk that a borrower or issuer will fail to meet their financial obligations, such as bond payments. Counterparty risk is a specific form of credit risk in a bilateral transaction, where one party faces the risk that the other party (the counterparty) will default before the final settlement of the transaction.
In derivatives, central clearing eliminates the bilateral counterparty risk between traders by interposing the clearing house.
Glossar
Credit Risk
Exposure ⎊ The potential for financial loss due to the failure of a borrower or counterparty to fulfill their debt obligations, a key consideration when underwriting decentralized loans or providing liquidity to lending pools.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Credit Default Swap
Mechanism ⎊ A credit default swap, within cryptocurrency derivatives, functions as a transfer of counterparty credit risk, analogous to insurance against default on an underlying asset ⎊ typically a debt instrument, but increasingly referencing crypto lending protocols or tokenized credit events.