Counterparty Risk refers to risks associated with the other party (individual or firm) with whom a firm enters a financial contract. The risk arises because the other party can default on their obligations and fail to fulfill their side of the contract. In business valuation analysis, counterparty risk can affect the possibility of realising future cash flows which in turn can affect the fair market value of the business being valued. When there is a high risk of counterparty risk actualising, business valuators discount the expected cash flow by the cash which will be affected.