Pre-settlement risk

Pre-settlement risk is the risk that one party to a contract becomes insolvent before delivering its side of the contract.

For treasurers it is vital that hedging counterparties remain solvent for the duration of the hedging contract – otherwise the hedge evaporates.

A similar risk occurs in commercial contracts.

Customers may become insolvent before paying for goods, and supplier insolvency may threaten production schedules.

See also

• Credit risk
• Hedging
• Insolvency