Replacement Risk

Replacement Risk

A type of risk resulting from a situation in which the holder of a contract knows that the counter party will be unable to meet the terms of a contract, and thus a new replacement contract will have to be entered into. Also known as "replacement-cost risk", which refers to the cost associated with replacing the contract.

Notes:

For example, if a counter party in an agreement fails to fulfill its contractual obligation, you now have to replace whatever it was the counter party was supposed to deliver (e.g. an interest rate, a stock, a commodity, etc). Of course, there is a good chance that you won't be able to do this at the same price, since the market has probably moved since the contract was created.

See also: Credit Risk, Default Risk, Forex - FX, Pre-Settlement Risk, Risk/Return Trade-off, Settlement Risk