Wrong Way Risk
Wrong-way risk is defined by the International Swaps and Derivatives Association (ISDA) as the risk that occurs when “exposure to a counterparty is adversely correlated with the credit quality of that counterparty”. In short it arises when default risk and credit exposure increase together. The terms ‘wrong-way risk’ and ‘wrong-way exposure’ are often used interchangeably.
Ordinarily in trading book credit risk measurement, the creditworthiness of the counterparty and the exposure of a
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