Wrong way risk

It is a source of concerns for banks and regulators, as it increases the overall counterparty credit risk.

It is opposed to right way risk (RWR), which occurs when one party's payment obligations are positively correlated to the same party's credit worthiness and thus reduces the overall counterparty credit risk.

If the stock suddenly loses value, the company's credit quality will decrease, while also increasing its liability to the owner of the put option.

General wrong way risk (also known as conjectural wrong way risk) arises through macroeconomic factors that are not specifically affecting the counterparty, such as a shock on interest rates.

If interest rates rise globally, Party A's exposure increases while the counterparty's likelihood of default increases (as it is now obligated to make larger interest payments).