Identifying right- and wrong-way risk is crucial in managing risk. Often risk managers within the energy sector struggle to identify which kind of risk they face and the consequences can be catastrophic.
The International Swaps and Derivatives Association defines wrong-way risk as the risk that occurs when “exposure to a counterparty is adversely correlated with the credit quality of that counterparty”. In essence, it arises when default risk and credit exposure increase together. Right-way ris