Friday, July 29, 2005

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.
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 <http://www.investopedia.com/terms/r/replacementrisk.asp#> , a stock <http://www.investopedia.com/terms/r/replacementrisk.asp#> , 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.

Financial Risk
The risk that a company will not have adequate cash flow to meet financial obligations.
Financial risk is the additional risk a shareholder bears when a company uses debt in addition to equity <http://www.investopedia.com/terms/f/financialrisk.asp#> financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity.

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