Payment default is a concept referring to a party's failure to meet its contractual obligations to make a specified payment at a specified date.In foreign exchange, a payment default often occurs if a counterparty fails to protect itself against transaction risk and is then subject to negative exchange rate movements.For example, a company in London places an order with an American supplier, with the goods order costing $1 million. The payment is due in 60 days from the time of placing the order. The exchange rate at the time of placing the order is USD/GBP 0.60.In order to make the payment, the London-based company requests a line of credit to cover this amount.However, in the intervening period, the Bank of England announces a monetary stimulus package, which weakens the pound's value severely against the dollar, with the rate moving to USD/GBP 0.75.Due to that depreciation of the pound, the line of credit obtained is no longer sufficient for the company to pay the agreed amount in dollars and it therefore defaults on its payment.Payment defaults can be damaging to companies. They disrupt trade and, at a certain level, they may have a toxic effect on the general economy. If a sector, or indeed an economy, suffers from a default spiral, where payment defaults build and begin to cause more defaults in a domino effect, it can cause severe economic damage. On a smaller scale, it can severely dent a company's profit margins and even plunge a company into debt or insolvency.For such reasons, it is of fundamental importance to hedge against credit risk and foreign exchange volatility.