Settlement Risk

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Paul Tracy

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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated August 5, 2020

What is Settlement Risk?

Settlement risk refers to the risk or probability that one party will not uphold their contractual obligation in a transaction or deal.

How Does Settlement Risk Work?

Settlement risk is most often associated with currency trading. However, it can also apply to any contractual deal between two parties. Settlement risk is the risk taken by each party in a contractual transaction that the other party will not uphold their end of the bargain (e.g. monetary payment or delivery of goods/services).

To illustrate, suppose Bob, a remodeling contractor, enters into a deal with Jack to remodel his kitchen for $5000. For Bob, the settlement risk is that Jack will fail to pay Bob the $5000 he owes once the kitchen is remodeled. Should Jack agree to pay Bob the $5000 prior to the job, Jack then takes on the settlement risk: that the kitchen remodeling will not occur or will not be completed.

Why Does Settlement Risk Matter?

Settlement risk is inherent in any transaction between two parties. In the event one party does not uphold their obligations in a transaction, it represents a loss on the part of the other party. For this reason, settlement risk is the risk of loss for either party should the counterparty not come through.  

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At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Settlement Risk.
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