A type of credit risk that arises or may arise on both sides of a transaction if a credit event occurs, creating a bilateral risk of loss due to inability or unwillingness of a counterparty (i.e., either/ any counterparty) to fulfill its respective contractual obligations related to making timely payments and settling due payables. This situation may arise from an actual default or by deterioration in a counterparty’s credit quality. In which case, the impact may take place on either side of the transaction- that is, the market value of the transaction can be positive or negative to either counterparty, not only limited to one specific counterparty.
In the event of default by a given counterparty, immediate losses would be incurred by the other counterparty, whereas future losses, in the event of deteriorating credit quality, would be expected, with an actual impact being inflicted on mark-to-market valuations.
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