(1) Exposure to loss as a result of default on a swap, debt, or other counterparty instrument. (2) Exposure to loss as a result of a decline in market value stemming from a credit downgrade of an issuer or counterparty. Credit risk may be reduced by credit screening before a transaction is effected or by instrument provisions that attempt to offset the effect of a default or require increased payments in the event of a credit downgrade. (3) A component of return variability resulting from the possibility of an event of default. (4) A change in the market's perception of the probability of an event of default, which affects the spread between two rates or reference indexes. See, for example, Treasury/EuroDollar (TED) Spread (diagram). See Credit or Counterparty Risk discussion