More on the work of J. Kerviel
J. Kerviel is an arbitragist. Making an arbitrage means that you buy a financial product A at some place and, at the same time, you sell another product B, with similar structure, on the same place or another. The gain/loss is realised on the difference between this two positions. Intuitively, we could think that the risk is low when the structure of products A && B are close enough. However, just remind that Nick Leeson was also an arbitragist. One has also to consider the huge risk! ALWAYS, this is the most important! For example, when volatility is increasing too much, this method (if not adapted) becomes quite dangerous and any risk control unvaluable… You can read us to get more informations: http://safe-trading.blogspot.com/2007/12/efficient-market-hypothesis.html && http://safe-trading.blogspot.com/2007/12/forecasts.html. In case of fraud, for example if the position B is not completed, the situation is completly under control… The best would be to forget this kind of strategy: the market risk may be underestimated && also, the operational risk (in case of mistake or fraud) is too large!