Why is counterparty risk greater for trading

Reference no: EM131305223

In one of his annual letters to shareholders of Berkshire Hathaway, Warren Buffett wrote that trading derivatives has much more counterparty risk than does trading stocks or bonds because "a normal stock trade is completed in a few days with one party getting its cash, the other its securities. Counterparty risk therefore quickly disappears. . . ."

a. What is counterparty risk?

b. Why is counterparty risk greater for trading in derivatives than for trading in stocks and bonds?

Reference no: EM131305223

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