Settlement Risk
Learner identifies settlement risk, including Herstatt risk, principal risk, and replacement cost risk, and explains mitigations such as payment versus payment, netting, and limits. Learner demonstrates this skill using realistic banking examples, explaining each step clearly and using correct terminology throughout.
Settlement risk: Herstatt risk, principal risk, and how PVP and CLS protect the system.
What You Can Do After This Chapter
Learning objective. Learner identifies settlement risk, including Herstatt risk, principal risk, and replacement cost risk, and explains mitigations such as payment versus payment, netting, and limits. Learner demonstrates this skill using realistic banking examples, explaining each step clearly and using correct terminology throughout.
Practical assessment. Learner analyses a 5,000,000 euro foreign exchange settlement where one leg settles in Tokyo and the other in London, identifying the time gap, the principal at risk, and the Herstatt risk. Learner then evaluates three mitigations, payment versus payment, bilateral limits, and prefunding, and recommends one with a written justification based on cost and risk reduction. Learner submits the work with all calculations, sources, and assumptions stated clearly, and checks the result against the chapter checklist before final submission.
Expected deliverables.
- Settlement risk case analysis
- Risk type identification table
- Mitigation comparison with costs
- Recommendation with justification
Completion criterion. Learner identifies the principal at risk and the time gap correctly, explains Herstatt risk accurately, and justifies the chosen mitigation with cost and risk. Completion is judged on accuracy, completeness, and clear reasoning throughout the submitted work.