Quick answer: Credit risk management protects a company from losses when a counterparty or borrower fails to meet its obligations. It works through disciplined credit assessment, exposure limits, collateral and netting, and continuous monitoring — so a single default does not become a serious loss.

What is credit risk?

Credit risk is the risk that a counterparty or customer will not pay what it owes. It is one of the four core exposures in financial risk management and is especially important wherever firms trade, lend, or hedge with counterparties.

Where does credit risk arise?

It arises from customer receivables, loans, and — importantly for energy firms — derivatives and physical trades where a counterparty might default before settlement. Concentrated exposure to a single counterparty is a common vulnerability.

How is credit risk assessed and limited?

Firms assess creditworthiness using financial analysis, credit ratings, and scoring models, then set exposure limits per counterparty. These assessments feed the broader risk assessment process and are increasingly supported by data analytics.

How is credit risk mitigated?

Key techniques include collateral and margin, netting agreements, diversification across counterparties, and credit derivatives. Ongoing monitoring catches deterioration early. Mobius Risk Group's commodity credit and counterparty risk management services help energy firms manage exactly these exposures.

Frequently asked questions

What is credit risk?

The risk that a counterparty, borrower, or customer fails to meet its financial obligations, causing a loss to the firm exposed to it.

How do firms reduce credit risk?

Through credit assessment, exposure limits, collateral and netting agreements, diversification, and continuous monitoring of counterparties.

Why is counterparty credit risk important in hedging?

Because a hedge only protects you if the counterparty performs; if it defaults, the hedge may fail precisely when it is needed.