Pre-settlement risk

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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