Mismatch Risk

AAA

DEFINITION of 'Mismatch Risk'

1) A category of risk that refers to the possibility that a swap dealer will be unable to find a suitable counterparty for a swap transaction for which it is acting as an intermediary.

2) The risk that an investor has chosen investments that are not suitable for his or her circumstances.

INVESTOPEDIA EXPLAINS 'Mismatch Risk'

1) A number of different factors can make it difficult for a swap bank to find a counterparty for a swap transaction. For example, wanting to participate in a swap with a very large notional principal may limit the number of available counterparties.

2) A mismatch between investment type and investment horizon can be a source of mismatch risk. For example, mismatch risk would exist in a situation where an investor with a short investment horizon (such as one who is near retirement) invests heavily in speculative hi-tech stock. Typically, investors with short investment horizons should focus on less speculative investments such as fixed income securities and blue chip equities.

RELATED TERMS
  1. Financial Intermediary

    An entity that acts as the middleman between two parties in a ...
  2. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
  3. Risk

    The chance that an investment's actual return will be different ...
  4. Swap

    Traditionally, the exchange of one security for another to change ...
  5. Time Horizon

    The length of time over which an investment is made or held before ...
  6. Swap Dealer

    An individual who acts as the counterparty in a swap agreement ...
Related Articles
  1. The Seasons Of An Investor's Life
    Investing Basics

    The Seasons Of An Investor's Life

  2. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  3. Asset Allocation In A Bond Portfolio
    Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

  4. Stock Safety: Top 3 Ways to Limit Your ...
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center