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Measuring "Herstatt Risk"

Author

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  • Sawaichiro Kamata

    (Research Division 2, Institute for Monetary and Economic Studies, Bank of Japan)

Abstract

"Herstatt risk" occurs when one party may not be able to receive another party's currency after delivering its own due to the delivery lag between the two currencies traded in the foreign exchange market. This risk can be measured by assuming that it is an increasing function of the delivery lag and transaction value. As a result, the degree of Herstatt risk can be obtained by market, type of transaction, and currency. One way to reduce the risk is to realize "delivery versus payment" between any two currencies.

Suggested Citation

  • Sawaichiro Kamata, 1990. "Measuring "Herstatt Risk"," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 8(2), pages 59-74, September.
    • Handle: RePEc:ime:imemes:v:8:y:1990:i:2:p:59-74
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me8-2-4.pdf
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    Cited by:

    1. Chitru S. Fernando & Richard J. Herring, 2001. "Liquidity Shocks, Systemic Risk, and Market Collapse: Theory and Application to the Market for Perps," Center for Financial Institutions Working Papers 01-34, Wharton School Center for Financial Institutions, University of Pennsylvania.

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