CFA Practice Question

There are 221 practice questions for this study session.

CFA Practice Question

On June 26, 1974, the license of a German bank (Herstatt) was withdrawn by German regulators at the end of the banking day (4:30pm local time) because of a lack of income and capital to cover liabilities that were due. Some banks had undertaken foreign exchange transactions with Herstatt and had already paid Deutsche marks to the bank during the day, believing they would receive U.S. dollars later the same day in the U.S. from Herstatt's U.S. nostro. But after 3:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payments. Risk like this is referred to as ______.
A. credit risk
B. liquidity risk
C. settlement risk
Explanation: Settlement risk is the risk that one party will fail to deliver on the terms of a contract with another party at the time of settlement. Settlement risk can be the risk associated with default at settlement and any timing differences in settlement between the two parties. This type of risk can lead to principal risk.

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