Pre-Settlement Risk

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DEFINITION

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

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.


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