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Module 1 · Asset Management

Porsche / Volkswagen (2008)

★ HIGH PRIORITY

Context

Porsche secretly accumulated a 74.1% economic stake in VW through cash-settled derivatives, avoiding disclosure requirements. VW was the world's most shorted stock. When Porsche revealed its position, the short squeeze sent VW's share price from €200 to €1,005 in two days — briefly making it the world's most valuable company.

Exam Question

What does the Porsche/VW case illustrate about limits to arbitrage?

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Answer · Porsche / Volkswagen (2008)

Key Finance Lesson

Short-selling requires borrowing shares. When the free float collapses (only ~1% of VW shares were freely tradeable after Porsche's disclosure), short-sellers cannot cover their positions — creating a catastrophic short squeeze. This is the 'synchronisation risk' and 'noise trader risk' that prevents arbitrageurs from correcting mispricing.

Key Details

  • ·Porsche used cash-settled derivatives (options) to build its stake without triggering the 30% mandatory bid threshold or disclosure rules.
  • ·The short squeeze is a textbook example of 'limits to arbitrage': even when a price is clearly wrong, rational arbitrageurs may not be able to correct it.
  • ·Hedge funds lost an estimated €20–30 billion in two days. Several were forced to liquidate other positions to meet margin calls.
  • ·Key exam point: Derivatives can be used to build economic exposure without triggering regulatory ownership thresholds.
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