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.

BREAKING DOWN '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. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Delivery Date

    1. The final date by which the underlying commodity for a futures ...
  3. Contract Unit

    The actual amount of the underlying asset represented by a single ...
  4. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
  5. Front Month

    Used in futures trading to refer to the contract month with an ...
  6. Form 6781: Gains And Losses From ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
Related Articles
  1. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  2. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  3. Trading

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
  4. Investing

    How Are Futures Used To Hedge A Position?

    A futures contract is an arrangement two parties make to buy or sell an asset at a particular price and date in the future.
  5. Trading

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  6. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  7. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
RELATED FAQS
  1. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  2. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  3. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  4. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
  5. What is the difference between a forward rate and a spot rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center