Counterparty Credit Risk: Overview

Owing to the dramatic increase in OTC derivative transactions with respect to volumes on exchanges, counterparty credit risk (CCR) has become a major issue for banks and regulators alike. CCR measurement must take account not only of current exposure, but also any future exposures to the counterparty. Here we examine the sources of current and future CCR, how this risk is similar to option exposure, and how CCR may be significantly reduced by the presence of a central clearinghouse.