An acronym for right way risk; the risk that arises when a counterparty risk is positively correlated with the credit quality of the counterparty in question. This results in a favorable situation where default risk and credit risk move in opposite directions. In other words, exposure decreases with the probability of default (the higher that probability, the lower the exposure).
For example, right 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 not negatively correlated with its credit exposure.
This risk comes into play when partial hedges are used for an existing exposure (e.g., when a financial institution sells call options on its own stock).
