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elearning > Settlement risk
Learn about the following:
What settlement risk is. Why it is also called Herstatt Risk. How foreign exchange markets reduce settlement risk. How securities markets reduce settlement risk.
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Course Summary
Settlement risk
- What settlement risk is
- Why it is also called "Herstatt risk"
- How foreign exchange markets reduce settlement risk
- How securities markets reduce settlement risk
30 minutes
7 question multiple choice test
1. Bankhaus Herstatt
- What happened in this classic case
- Small probability but large outcome
- How settlement risk affects all deals
- Reducing settlement risk
- Obligation netting
- Limits
2. Foreign exchange
- Continuously linked settlement
- Obligation to pay
- Pre-funding
- Payment versus payment
- Why it reduces settlement risk
3. Securities
- Delivery versus payment
- What it is and how it works
- Gross settlement
- Gross securities and net cash
- Net cash and net securities
- Why DVP reduces settlement risk
4. Summary
5. Test
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In a world where regulators are focusing on liquidity and capital it's easy to overlook market risk. In many firms this means interest rate exposure. In the UK with Bank Rate at an all time low it's tempting to think that hedging fixed rate assets is just a waste of money. After all why pay 3.25% on a 5 year swap when 3 month Libor is only 51 basis points? Surely matching the interest basis on assets and liabilities ends up costing you 274 bps doesn't it?
