Delivery Risk

DEFINITION of 'Delivery Risk'

The risk that a counterparty in a transaction may not be able to fulfill its side of the agreement by failing to deliver the underlying asset or the cash value of the contract.
Also called settlement risk.

In the foreign exchange context, delivery risk is also known as Herstatt risk, after the small German bank that failed to cover due obligations.

BREAKING DOWN 'Delivery Risk'

While delivery risk is relatively rare, the perception of this risk can be elevated during times of global financial strain, such as during and after the collapse of Lehman Brothers in September 2008. Since it is a bigger issue in over-the-counter trading, such as with bonds and currency markets, measures to mitigate this risk include settlement via clearing houses and mark-to-market measures.