What situation describes settlement risk?

Settlement risk, often referred to as delivery risk, arises during the financial transaction process, particularly in scenarios involving the exchange of payments or securities. It specifically refers to the risk that one party in a transaction fails to provide the necessary payment or asset to the other party as agreed upon at the time of the trade.

In the context of the given question, the first scenario — where a party fails to deliver the payment amount — accurately captures this concept. When one party does not fulfill their payment obligation, it jeopardizes the entire settlement process and can lead to financial loss, legal disputes, and trust issues between the involved parties. This risk manifests particularly in the instance of securities trading or foreign exchange transactions, where the expected delivery of cash or assets is crucial for finalizing the trade.

The other situations provided do not pertain directly to settlement risk. The inability to make timely financial disclosures relates more to disclosure risk or transparency issues. An increase in market volatility is connected to market risk, affecting the prices of assets but not directly the settlement of specific transactions. Lastly, fraudulent activities refer to operational risks or compliance failures, which involve dishonesty or deception rather than the mechanics of settling a financial transaction. Understanding these distinctions highlights why the failure to deliver a payment amount