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
Specific WWR: you are long a put on a bank and the bank is the writer. General WWR: exposure to EM FX rises when the sovereign that hedges you is also deteriorating. CVA desks charge for it; cash books often ignore it until Sunday.
Why it matters
It turns a ‘hedged’ book into a double short. 2008 monolines and 2022 commodity-trader margin were WWR events.
Case
Buying protection on a name from a dealer who is the same name’s largest lender. Or FX forwards with a local bank in a currency crisis.
How to read it
Map legal netting, collateral, and the correlation between exposure and default. If that correlation is positive, you have WWR.