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Trades of foreign currencies settle either "spot" (1 or 2 business day settlement - the more actively traded currencies settle in 1 day; less actively traded currencies settle in 2 days) or forward (a mutually agreed date in the future). Do not confuse this with trades of foreign currency options.

In Forex (FX) trading, the settlement currency (also referred to as payment currency) is the second currency listed in the currency pair description (example: EUR. USD). The transaction currency multiplied by the exchange rate will indicate the settlement currency amount for the transaction.

Settlement Risk Distinguished from Other Risks The principal risk in settlement of such trade is that one party would pay out the currency it sold but not receive the currency it bought. This is called foreign exchange or cross-currency settlement risk.

For example, suppose an investor is interested in purchasing euros with Canadian dollars, and they want to take advantage of the mispricing of the currencies in order to earn a profit from an arbitrage strategy. Afterward, they sell the euros to purchase U.S. dollars.

Cross-currency settlement risk is a type of settlement risk in which a party involved in a foreign exchange transaction sends the currency it has sold but does not receive the currency it has bought. In cross-currency settlement risk, the full amount of the currency purchased is at risk.

What is Cross Currency? Cross currency means a currency pair or transaction that does not involve the US dollar. A cross-currency transaction does not use the US dollar as the contract settlement currency. A cross currency pair is one that has a pair of currencies traded in forex that is not inclusive of the US dollar.

LCS allows exporters and importers to transact in their respective domestic currencies. This plays a productive impact on transaction costs and processing time. Under this system, traders have the flexibility to choose the payment currency for efficient cross-border transactions.