In the context of finance and investing, a counterparty is the other party that participates in a financial transaction. Every transaction must have two parties, the buyer and the seller, and each party is a counterparty to the other.
For example, if you were to buy a stock, the person or institution selling you that stock would be your counterparty. Similarly, if you enter into a derivative contract like a futures contract or a swap, the person or institution on the other side of that contract is your counterparty.
Each party in a transaction assumes a certain amount of risk, often referred to as counterparty risk, that the other party will not fulfill their obligations under the terms of the contract. In many cases, especially in more complex financial transactions like derivatives or loans, these risks are managed and mitigated through various contractual agreements and regulations.
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