HEDGE FUNDS AND PRIVATE EQUITY

Let me first summarize the general consensus on the “GLOBALL thought experiment” – the hypothetical global currency. Your discussions were both on point, thoughtful, and enjoyable to read.  Most of the class was of the mindset that it would not likely work (particularly in the short run) for various reasons — most important being loss of monetary sovereignty, political frictions, and various market imperfections including lack of complete labor mobility. The recent European crises with several countries having excessive debt and their effects on the Euro further highlight the difficulties in maintaining or growing a common currency. These concerns often show-up in sovereign yield spreads as redenomination risk – the risk that euro assets will be redenominated into a devalued legacy currency. While the euro is an important recent test case for examining and quantifying redenomination risk, there is an extensive literature that has examined direct and indirect forms of redenomination risk as many countries overtime have used an external currency as their sovereign currency or have redenominated their own sovereign currencies. In terms of a broader perspective, redenomination risk was an important issue in, for example, the wake of the Mexican financial crisis of 1994–1995, the Asian financial crisis of 1997, and Argentina’s financial crisis in 2001–2002 with a movement away from a dollar-based economy. The break-up of the Czechoslovakian currency union in 1993 and the break-up of the Ruble currency area between 1992 and 1995 are additional examples.