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Risk |
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The default risk relating to creating a foreign exchange payment to a counter
party before the counter payment is received.
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In other words, the possibility that your counter party will
never pay you.
Sometimes settlement risk is sometimes called Herstatt risk because of the well-known failure of the German Herstatt bank. On June 26, 1974 the bank had already taken in its foreign currency
receipts in Europe, but had not made any of its US dollar payments when German banking regulators closed the bank down. Counterparties to the German bank incurred substantial losses.
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