Counterparty risk is the possibility that the party supporting the other side of an agreement will default on its obligations. For example, the holder of an option to buy property exercises its option, and the party holding the property refuses to sell. This risk is higher in situations where there is no third-party guarantor that ensures the performance of both parties. Counterparty risk should always be considered before entering into a contract. Counterparty risk is also known as default risk.