Risks in Foreign Exchange Trading, (cont.) II

• 1. Counterparty risk is

  the risk of default on the terms or conditions of the contract
  

• 2. Clearing risk &

• 3. Settlement risk

1, 2 & 3 are related

• All buyers & sellers have the same counterparty

  • a clearinghouse. This standardizes the clearing risk [to a certain extent]

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a drawback - need of capital controls,

an advantage - variability across the countries