Pretty-Face Risk

The risk that arises from the tendency of a derivatives user/ dealer to judge a counterparty to a derivatives transaction by mere appearances, without reflection or candor- that is, as it appears structurally without a second thought to what lies beneath the surface. When companies, including giant ones, come under pressure, especially after a busted derivatives transaction, only very few can survive or stand firm in the face of devastating rippling effects. Therefore, every participant in the derivatives market needs to carefully assess the counterparty risk regardless of the size of that counterparty. In short, having large institutional investors on the opposite side of the transaction doesn’t mean the counterparty risk is non-existent or trivial.