Mismatch Risk

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.

BREAKING DOWN '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.

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