Wrong way risk

The risk that the value/effectiveness of a hedge or risk management product is most doubtful when most needed.

For example, when the credit standing of the seller of securities in a repo is positively correlated with that of the security sold.

This was illustrated in swaps when Parmalat the Italian dairy firm (in 2003 Europe's biggest bankruptcy) sold credit default swaps on itself.

See also

• Hedge
• Guide to risk management
• Swap