So I have traded XRP to BTC and now I have 1 BTC on my Ripple wallet. It is a BTC.IOU or a real BTC? Is there any third party risk with keeping that BTC in my Ripple wallet?
Yes, there is absolutely counter-party risk. You are trusting your gateway (issuer) to hold your BTC. They issue you an IOU of that asset to utilize within the Ripple Network. To remove counter-party risk, withdrawal your BTC back to your own BTC wallet.
This is why I believe Ripple has the potential to hugely backfire. Imagine if multiple trusted gateways go byzantine and behave badly, possibly in a network partition situation. Fast transactions means the potential for large divergence if things do screw up.