What is meant by 'third-party risk'?

Third-party risk refers to the potential for negative consequences that arise when an organization partners with or relies on external entities, such as vendors, service providers, or business partners, who may not fulfill their obligations as expected. This risk can manifest in various forms, including financial loss, damage to reputation, or operational disruptions. Organizations must evaluate and manage third-party risk effectively because the actions or failures of these external parties can directly impact their own performance and compliance.

In contrast, the other concepts presented describe different types of risk. Financial losses due to stock market fluctuations pertain to market risk, while internal employee misconduct relates to operational or compliance risk. The threat of cyber attacks is a specific security risk that, while potentially linked to third parties, does not encapsulate the broader implications of third-party relationships and obligations.