Closing Thoughts on Risk-Free Rates
Looking at the bigger picture, we can break the estimation of a risk-free rate into steps, starting with a choice of currency and working down to include views on future rate levels. The steps are captured in Figure 6.7.
Summarizing the key points made in this chapter, we would list the following as the key rules to follow when it comes to risk-free rates:
A risk-free rate should be truly free of risk. A rate that has risk spreads embedded in it for default or other factors is not a risk-free rate. This is why we argued that local ...
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