Today, you sell GBP 5,000,000.00 to a customer against JPY for spot value. Tomorrow, the customer defaults. What is your exposure called?
A) Replacement risk
B) Settlement risk
C) Legal risk
D) Basis risk

Question

Quizplus · Accepted Answer

Replacement risk refers to the risk of loss arising from the need to replace a contract at current market rates due to a counterparty defaulting on their obligation. In this scenario, the customer defaulting on the currency transaction exposes you to replacement risk.

Today, You Sell GBP 5,000,000