Editing Arbitrage (section)

===Counterparty risk===
As arbitrages generally involve ''future'' movements of cash, they are subject to [[counterparty risk]]: the risk that a counterparty fails to fulfill their side of a transaction. This is a serious problem if one has either a single trade or many related trades with a single counterparty, whose failure thus poses a threat, or in the event of a financial crisis when many counterparties fail. This hazard is serious because of the large quantities one must trade in order to make a profit on small price differences.

For example, if one purchases many risky bonds, then hedges them with [[Credit default swap|CDSes]], profiting from the difference between the bond spread and the CDS premium, in a financial crisis, the bonds may default ''and'' the CDS writer/seller may fail, due to the stress of the crisis, causing the arbitrageur to face steep losses.