The “Herstatt risk” is the risk that one party in a foreign exchange transaction pays out the currency it sold but does not receive the counter-currency it bought. The name of this settlement risk, also known as “principal risk”, refers back to the case involving Herstatt Bank in 1974. The bank speculated heavily in currency options, particularly the US dollar. One morning, Herstatt Bank received payments in German marks and sold US dollars in return. But due to the time difference, the US payments systems weren’t open yet, and the payment in US dollars wasn’t processed. In the meantime, the German banking regulatory authority withdrew Herstatt Bank’s license, and the bank had to declare bankruptcy. As a result, Herstatt Bank received the German marks, but the counterparty did not receive any US dollars.