What Is "Principal Risk" in a Settlement Context? ▴ Learn

What Is “Principal Risk” in a Settlement Context?

Principal risk, also known as Herstatt risk, is the risk of losing the full value of the asset being traded (the principal) due to the failure of the counterparty to deliver their side of the trade after the first party has already delivered theirs. It arises from the lack of synchronization in the exchange process.

Delivery Versus Payment (DVP) is designed specifically to eliminate this risk.

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