The risk associated with doing business with anotherparty who may be unable to fulfill its side of the obligation and will ultimatelydefault is known as Counterparty risk. In exploring our three companies we willsoon see why counterparty risk can be a big risk for them. Our three companiesare large in capacity and the counterparty risk that they face revolves around:trade, vendor non-trade receivables and long-term prepayments.AAPL Counterparty RiskTill date AAPL has not realized any significant losseson its cash, cash equivalents and marketable securities, but, there is alwaysthe risk that future fluctuations in their value could result in significantlosses. From the company’s 10K we see that the company’s credit ratings andpricing of its investments can be negatively affected by: liquidity, creditdeterioration, financial results, economic risk, political risk and sovereignrisk. The company’s 10K shows that AAPL’s exposure to credit risk on its tradereceivables is higher in certain international markets and APPL’s ability tomitigate the risks is confined.

The company is also exposed to credit risk onits trade accounts receivable and vendor non-trade receivables related to its long-termsupply agreements. The company’s 10K shows that trade receivables as ofSeptember 2017, in which AAPL had two customers that individually represented10% or more of total trade receivables, each of which accounted for 10%. On thevendor non-trade receivables side on September 2017, AAPL had three vendors,which accounted for 42%, 19% and 10% showing that the vendors individuallyrepresented 10% or more of total vendor non-trade receivables.

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In terms of managing the counterparty risk thecompany’s 10K confirms that AAPL has procedures to monitor and limit thecompany’s exposure to credit risk on its trade and vendor non-tradereceivables, as well as long-term prepayments. In certain instances AAPLrequires its vendors to provide with a collateral to limit the credit risk. The10K also shows that the company enters into master netting arrangements. The masternetting arrangements are designed to reduce credit risk by allowing netsettlement of transactions with the same counterparty. Now let’s understandwhat a master netting arrangement is. A master netting arrangement is a master contractbetween two counterparties that have multiple derivative contracts opened witheach other.

In an event of default or on termination of any one contact, themaster agreement provides for the net settlement of all contracts which areopened between the two counterparties, as well as cash collateral, through asingle payment, in a single currency. We also see that the net cash collateralreceived by AAPL pertaining to derivative instruments under its collateralsecurity arrangements as of September, 2017 and September, 2016 was $35 millionand $163 million, respectively. Further the 10K also provides information that AAPLlimits the company’s credit risk on trade receivables with credit insurance forcertain customers, requiring third-party financing, loans or leases to supportcredit exposure.