Mitigating Counterparty Risks

An accomplished California-based finance professional, Micah Scheinberg leverages more than two decades of experience in securities as a financial advisor and managing director at Alex Brown, a division of investment bank Raymond James. Micah Scheinberg manages client portfolios and is knowledgeable about various instruments such as derivatives.

A derivative is a special type of financial security that is agreed upon by two or more parties. Their prices are determined by variations in the underlying assets which can be stocks, commodities, currencies, bonds, and market indexes. Over-the-counter (OTC) transactions are one of the most popular ways to trade derivatives; that is, the derivatives are not listed on an intermediary centralized exchange

Counterparty risk, or the chance that one of the parties engaged in the contract may default, is usually higher in OTC-traded derivatives. To avoid this investors usually purchase currency derivatives to lock in a certain exchange rate. Currency futures are a common option in this endeavor.

Currency futures are ETFs that define the price in one currency at which another currency may be purchased or sold at a later date. Currency futures contracts are legally binding, and counterparties who retain them on the expiration date must deliver the given currency amount on the specified delivery date at the provided pricing.