Wrong-Way Risk
Wrong-way risk is when exposure rises at the same time the counterparty’s credit worsens — the hedge or the receivable fails exactly when you need it.
Definition
Wrong-Way Risk refers to way risk is when exposure rises at the same time the counterparty’s credit worsens — the hedge or the receivable fails exactly when you need it. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It is a named object desks use to frame risk, positioning, or process. When way risk is when exposure rises at the same time the counterparty’s credit worsens — the hedge or the receivable fails exactly when you need it shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what wrong-way risk is saying. If way risk is when exposure rises at the same time the counterparty’s credit worsens — the hedge or the receivable fails exactly when you need it moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Keep the definition fixed, then challenge it with cross-checks before sizing. Prefer a short written null hypothesis for Wrong-Way Risk: what would falsify the current reading in the next window?