Replacement Risk

AAA

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".

INVESTOPEDIA EXPLAINS '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. 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. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  5. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
  6. Pre-Settlement Risk

    The risk that one party of a contract will fail to meet the terms ...
Related Articles
  1. The 4 Advantages of Options
    Options & Futures

    The 4 Advantages of Options

  2. All About Liquid Commodities
    Options & Futures

    All About Liquid Commodities

  3. Curious About Stock Index Futures? Read ...
    Options & Futures

    Curious About Stock Index Futures? Read ...

  4. How to Trade Futures Contracts
    Options & Futures

    How to Trade Futures Contracts

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center