replacement risk


Risk that a party will not fulfill their end of a contract, thus causing the other party to replace the traded item, and potentially incur a loss while doing so. If one party is not able to fulfill the contract for any reason, typically a replacement contract will be drawn up which requires the other party to give back what they've already been given. However, in many situations this is not easy for the party to do, because the value of the traded item is likely not the same as when they originally received it. Therefore, this party could possibly suffer a loss, and this is known as replacement risk.
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replacement reserve fund replacement value