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.

RELATED TERMS
  1. Counterparty Risk

    The risk to each party of a contract that the counterparty will ...
  2. Pre-Settlement Risk

    The risk that one party of a contract will fail to meet the terms ...
  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. Economics

    Who is a Counterparty?

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

    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. Professionals

    Terminating a Forward Contract Prior to Expiration

    CFA Level 1 - Terminating a Forward Contract Prior to Expiration. Learn how to terminate your position in a forward contract through use of an offset. Discusses default risk upon terminating ...
  4. Trading Strategies

    Contract for Difference (CFD) Risks

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

    Forward Contracts

    CFA Level 1 - Forward Contracts. Learn the characteristics of a forward contract. Includes the key features of this derivative and an example discussing how it trades.
  6. Professionals

    Fundamental Differences Between Futures and Forwards

    CFA Level 1 - Fundamental Differences Between Futures and Forwards. Learn the fundamental differences between futures and forward contracts. Contrasts how and where they trade and discusses marking ...
  7. Markets

    Intermediate Guide To E-Mini Futures Contracts - Rollover Dates And Expiration

    A contract month is the month in which a futures contract expires. All of the e-mini stock index futures contracts trade on the March quarterly expiration cycle (March, June, September and December). ...
  8. Term

    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.
  9. Professionals

    Other Types of Derivatives

    CFA Level 1 - Other Types of Derivatives. Learn four other types of derivative contracts, including the characteristics of Eurodollar futures, currency and stock index contracts.
  10. Professionals

    End Users and Dealers

    CFA Level 1 - End Users and Dealers. Learn how end users and dealers interact in the forwards market. Provides examples showcasing the role of both in a financial transaction.
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 >>
  6. 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 >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center