Finance Theory — 6.4: Short Selling and Arbitrage

Описание: In math class, when a system of equations has no solution, you lose points. On Wall Street, 'no solution' means free money.

Discover why short selling is the hidden enforcement mechanism that keeps financial markets honest—and what happens when governments ban it during crises. Learn how MIT graduates in the 1970s used linear algebra to find arbitrage opportunities in bond markets, turning mathematical inconsistencies into billions of dollars.

📚 Key concepts covered:
• Short selling mechanics: the four-step process that lets traders profit from falling prices
• The Law of One Price: why identical cash flows should have identical prices, and what enforces this
• What happened when short selling was banned in 2008 and 2020—and why pricing relationships broke down
• Bond pricing as systems of linear equations: when 'no solution' signals arbitrage
• Fixed income arbitrage: how Salomon Brothers used supercomputers to find riskless profits
• Why the 'free lunch' still exists today, but requires speed, scale, and sophisticated models

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📖 ORIGINAL SOURCE
This video distills concepts from academic finance lectures on short selling and arbitrage mechanics.
Source:    • Ses 6: Fixed-Income Securities III  

Full credit to the original lecturer for the foundational content. Please visit the original for the complete academic treatment.