Replacement Risk

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.