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Question 14.11: The following appears in the 2000 10-K of International Busi...

The following appears in the 2000 10-K of International Business Machines:
The company employs a number of strategies to manage these risks, including the use of derivative financial instruments. Derivatives involve the risk of non-performance by the counterparty.
Explain what is meant in the last sentence of this quotation.

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In the case of derivatives, there is some underlying that is involved in a potential transaction in the future. For example, in the case of an interest rate swap, there is a future exchange of the net cash flows at each agreed-upon future date. There is risk that one of the parties—the other party, the counterparty—will not comply with the agree-upon exchange at one of the future dates.

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