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. Credit Risk

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

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

    The event in which companies or individuals will be unable to ...
  4. Replacement Risk

    The risk that a contract holder will know that the counterparty ...
  5. Settlement Date

    1. The date by which an executed security trade must be settled. ...
  6. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
Related Articles
  1. A Primer On The Forex Market
    Options & Futures

    A Primer On The Forex Market

  2. Futures Fundamentals
    Insurance

    Futures Fundamentals

  3. ISDA Master Agreement
    Investing Basics

    ISDA Master Agreement

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

    Credit Default Swaps: What Happens In ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

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

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

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

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. 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 ...
Trading Center