How Does the Concept of ‘PVP’ (Payment versus Payment) Apply to FX Derivatives?

Payment Versus Payment (PVP) is a mechanism in foreign exchange settlement that ensures the final transfer of one currency occurs only if the final transfer of the other currency also occurs. It is designed to eliminate Herstatt Risk (principal risk).

In FX derivatives, a mechanism like Continuous Linked Settlement (CLS) is used to achieve PVP, ensuring simultaneous exchange and eliminating the settlement lag.