Pre-Settlement Risk

AAA

DEFINITION of 'Pre-Settlement Risk'

The risk that one party of a contract will fail to meet the terms of the contract and default before the contract's settlement date, prematurely ending the contract.

This type of risk can lead to replacement-cost risk.

INVESTOPEDIA EXPLAINS 'Pre-Settlement Risk'

For example, let's say ABC company forms a contract on the foreign-exchange market with XYZ company to swap U.S. dollars for Japanese yen in two years. If prior to settlement XYZ company goes bankrupt, it will be unable to complete the exchange and must default on the contract. ABC company will have to form a new contract with another party which leads to replacement-cost risk.

RELATED TERMS
  1. Risk Management

    The process of identification, analysis and either acceptance ...
  2. Trade Date Accounting

    A method company accountants and bookkeepers use to record transactions ...
  3. Settlement Date Accounting

    An accounting method that accountants and bookkeepers use to ...
  4. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  5. Forex - FX

    The market in which currencies are traded. The forex market is ...
  6. Default Risk

    The event in which companies or individuals will be unable to ...
Related Articles
  1. A Primer On The Forex Market
    Options & Futures

    A Primer On The Forex Market

  2. Futures Fundamentals
    Insurance

    Futures Fundamentals

  3. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  4. Derivatives 101
    Fundamental Analysis

    Derivatives 101

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center