| Mismatch Risk |
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A category of risk that refers to the possibility that a swap dealer will be unable to find a suitable counterparty for a swap transaction for which it is acting as an intermediary. The risk that an investor has chosen investments that are not suitable for his or her circumstances.
A number of different factors can make it difficult for a swap bank to find a counterparty for a swap transaction. For example, wanting to participate in a swap with a very large notional principal may limit the number of available counterparties. A mismatch between investment type and investment horizon can be a source of mismatch risk. For example, mismatch risk would exist in a situation where an investor with a short investment horizon (such as one who is near retirement) invests heavily in speculative hi-tech stock. Typically, investors with short investment horizons should focus on less speculative investments such as fixed income securities and blue chip equities. |
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