"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.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.