by Kathleen Hughes, Head of Global Liquidity for EMEA, J.P. Morgan Asset Management
Credit and counterparty risk has fallen since the height of the global financial crisis, but it remains one of the most important concerns for corporate treasurers. Indeed, treasurers need look no further than the ongoing fiscal issues in the Eurozone (particularly the threat of sovereign default in Greece) to see why credit and counterparty risk always needs to be evaluated carefully and systematically.
In this article we take a closer look at credit and counterparty risk, explaining what it is, how it can be assessed and measured, and how it can be evaluated and managed within a cash portfolio.
What is credit and counterparty risk?
Credit and counterparty risk arises when an investor enters into a transaction with some form of payment obligation from another party, be it with a bank, a company or a government institution. This is because there is a risk that the bank, company or government will not be able to meet its repayment obligations.
Credit and counterparty risk simply refers to the risk that an issuer will default. The greater the potential for default, the higher the level of credit and counterparty risk.