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Stress Testing: Currency Risk in the Eurozone

MSCI cordially invites you to the second in a series of webinars about stress testing.

During this webinar, we will review the sobering financial outlook for Greece and other troubled European Economic and Monetary Union (EMU) sovereigns, and consider the possible consequences of a sovereign default or a rupture of the EMU. Applying covered interest parity to interest rates in EMU sovereigns, we will generate hypothetical forward rates, which are candidate proxies for exchange rates of new EMU currencies against the US dollar.

We will use the hypothetical forward rates to assess the potential redenomination loss to a swap dealer who has hedged interest exposure to a euro-denominated interest rate swap with a counterparty domiciled in Greece.

Agenda Topics Include:

MSCI's empirical study of hypothetical forward rates between January 2011 and March 2012 reveals:

  • Returns to the euro spot exchange rate and hypothetical 1-year forward exchange rates for the deutschmark were virtually identical
  • Returns to the hypothetical 1-year forward exchange rate for a new Greek drachma against the US dollar were substantially more volatile than returns to the euro
  • The euro and the hypothetical 1-year forward exchange rate for a new Greek drachma  have effectively decoupled
  • A new Portugal escudo may be emerging

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