Credit Risk Credit risk in general terms means the uncertainty of a counterparty (obligor) to meet its’ obligations. Counterparties can be individuals, small companies, large corporate entities or even countries. Typically credit risk is measured as an amount of exposure that arises from transactions. In assessing credit risk from a single counterparty, an institution must consider the following issues: Default Probability What is the likelihood that the counterparty will default on its obligation either over the life of the obligation? Credit Exposure In the event of a default, how large will the loss be? Exposures comprise settlement risk (the amount of money that is lost from non payment) plus the replacement cost if a counterparty fails to deliver and goods/services have to be replaced at unfavourable current prices (at the time of default). Various techniques can be applied to estimating or simulating the worst point in time that the counterparty could default. Recovery rate In the event of a default, what fraction of the exposure may be recovered through bankruptcy proceedings or some other form of settlement? Please click here to access further articles and resources related to credit risk management