DEFINITION of 'Replacement Risk'

The risk that a contract holder will know that the counterparty will be unable to meet the terms of a contract, creating the need for a replacement contract.

Also known as "replacement-cost risk".

BREAKING DOWN 'Replacement Risk'

For example, if a counterparty in an agreement fails to fulfill its contractual obligation, you will have to replace whatever it was the counterparty was supposed to deliver (e.g. an interest rate, a stock, a commodity, etc). Of course, there is a good chance that you won't be able to do this at the same price because the market will have moved since the contract was created.

RELATED TERMS
  1. Pre-Settlement Risk

    The risk that one party of a contract will fail to meet the terms ...
  2. Counterparty Risk

    The risk to each party of a contract that the counterparty will ...
  3. Counterparty

    The other party that participates in a financial transaction. ...
  4. Assignable Contract

    A futures contract with a provision permitting the contract holder ...
  5. Delivery Date

    1. The final date by which the underlying commodity for a futures ...
  6. Termination Clause

    A section of a swap contract that describes what will happen ...
Related Articles
  1. Investing

    Who is a Counterparty?

    The counterparty is the other party in a financial transaction.
  2. Investing

    Explaining Counterparty Risk

    Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.
  3. Investing

    Contract for Difference (CFD) Risks

    Contracts for differences are flexible, highly leverageable trading instruments. They offer potentially outsized returns accompanied by noteworthy risks.
  4. Investing

    What Do Central Counterparty Clearing Houses Do?

    A central counterparty clearing house facilitates trading in European derivatives and equities markets.
  5. 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.
  6. Financial Advisor

    Divorce and Annuities: What Clients Need to Know

    Divorce can be the most financially devastating event in a person’s life. Here’s what your clients need to know about handling annuities in a divorce case.
  7. Investing

    How to Trade Futures Contracts

    Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
  8. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  9. 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.
RELATED FAQS
  1. What is the default risk of a derivative?

    Learn about default and counterparty risk for derivatives, and understand why derivatives traded over the counter have significant ... Read Answer >>
  2. Who is the counterparty of a derivative?

    Learn about the counterparty to a derivative contract, and how derivative swap agreements traded over the counter have counterparty ... Read Answer >>
  3. How are forward contracts regulated in the United States?

    Read about the risks of forward contracts and why they are not readily subject to regulation, including what happens when ... Read Answer >>
  4. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  5. What are some examples of risks associated with financial markets?

    Find out about the different types of risks for different classes of assets including volatility, counterparty risk and default ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

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

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. 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 ...
  6. Job Market

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