The Greek Crisis and the Limits of Arbitrage

Arbitrage is the lynchpin of the self-regulating market. When an asset's price moves away from what it should be, arbitrageurs make money betting that the gap will close. George Soros's bet against the British pound in 1992, when he made a billion dollars in one day by shorting the currency, was the most famous example of this until John Paulson's megabets on credit default swaps in 2007-08 netted him three times as much.

via The Greek Crisis and the Limits of Arbitrage – HBS Faculty – Harvard Business Review.

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