The risk that arises when a counterparty risk is adversely correlated with the credit quality of the counterparty in question. This results in a situation where default risk and credit risk move in tandem- that is- the two risks move together. In other words, exposure increases with the probability of default (the higher that probability, the larger the exposure). For example, wrong way risk may result from exposure to a counterparty or issuer when the collateral asset posted by the counterparty or issued by the issuer is highly correlated with its credit exposure.
It is known as the “other side of the coin” risk or for short as WWR.
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