The risk owing to a timing difference in an interest rate swap transaction,when one party defaults on a payment to another before the other realises it,is called:
A) basis risk.
B) mismatch risk.
C) settlement risk.
D) front-end risk.

Question

Quizplus · Accepted Answer

Settlement risk arises when one party makes a payment to another party in a financial transaction, but the recipient does not receive the payment due to a timing difference, such as a default by the paying party. In an interest rate swap, settlement risk can occur when one party defaults before the other realizes it, resulting in a loss for the non-defaulting party. Basis risk refers to the risk that the correlation between two related financial instruments may change, while mismatch risk and front-end risk are not relevant to the scenario described.

The Risk Owing to a Timing Difference in an Interest