The risk of a loss due to closing out a transaction is referred to as ____ risk.

Question

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Settlement risk refers to the risk of loss due to a counterparty failing to fulfill its contractual obligation to settle a transaction. This can happen when one party has already performed its part of the transaction but has not yet received payment or other consideration from the counterparty. Settlement risk is common in financial markets, especially in transactions involving large amounts or where there is a time lag between the exchange of assets and payment. To mitigate settlement risk, counterparties can use various measures such as collateralization, netting, and payment-versus-payment systems.

The Risk of a Loss Due to Closing Out a Transaction