Counterparty considerations

Counterparty considerations

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Second round of write-downs threaten

Counterparty risk is becoming an increasingly important consideration for the credit derivatives market. Worst-case loss scenarios currently point to the possibility of financial institutions suffering a second round of CDS-related write-downs that have so far been unaccounted for.

The current market situation highlights the necessity of understanding what Prytania Group ceo Malcolm Perry calls 'wrong-way risk' - that if hedges are contingent, the scenarios in which a trade is dependent on them need to be analysed carefully.

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