A counterparty is the party on the opposite side of a transaction. For example, when you sell a car to a buyer, the buyer is the counterparty. Similarly, if you enter into a home insurance contract, the insurer is the counterparty. A counterparty can be an individual or some other entity, such as a company or a government.

Counterparty risk can arise when there is a possibility that the counterparty in a transaction is unable to fulfill its obligations. For example, there is a risk that, when you send money to a seller to buy goods online, the seller (the counterparty) will not ship you the goods.