What is Default Risk?

1) The risk that a party to a contract will not make a payment when it is required to do so. It is usually associated with insolvency or bankruptcy. When used in this way the term is synonymous with credit risk.

2) In the case of swap banking, the term is more widely used to describe the risk of a default event. An event of default may mean any credit event triggering the provisions in case of default of the swap.

This can be any credit event agreed upon by the contracting parties to the swap and may be very distant from timely payment of interest or principal.

3) In the case of swap banking, the term is sometimes used to describe the exposure of a swap bank to the combination of credit risk and market risk.

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