Product Overview

In January 2011, during the World Economic Forum's annual meeting in Davos, Switzerland, Jason Sterling, a hedge fund manager, was conducting online research to see if he could trade on any newsworthy information emerging from the summit. Sterling's fund traded primarily in sovereign debt, and he needed to figure out if European leaders would be able to come up with a viable solution to the crisis or whether the debt crisis would lead to the default of several European nations. He knew that if a solution was not found in the coming weeks, the sovereign debt markets could be thrown into turmoil.

Learning Objectives

?To discuss the roots of, and the assumptions, underlying the euro zone ?To understand the drivers of the Greek debt crisis ?To discuss the contagion risk that the sovereign debt crisis poses throughout the euro zone, and what effects a default would have on the euro, other countries, and financial institutions ?To understand the mechanisms that have been implemented to address the crisis and what problems they are meant to address ?To discuss the sustainability of the euro and what can be done to solve the debt crisis ?To calculate the range of market-implied probabilities of default of various euro zone countries given historical restructuring haircuts on sovereign debt and historical interest rates ?To develop a thesis for an investment in European sovereign debt-specifically, which position (long/short) and which instrument (bonds/credit default swap)