Sunday, 19 February 2012

Nominal risk free rate in local currency (Reading 38 - Valuation in Emerging Markets)

Nominal risk free rate in local currency = [{(1+Risk Free Rate based on 10-yr U.S. Government Bond Yield) x (1+local inflation)] / (1 + U.S. Inflation)}] - 1

Now this was something really confusing for me... I rearranged the formula and got this one

(1+Nominal RFR in Local Currency) / (1+local inflation) = (1+RFR on 10/Y US Govt. bond yield) / (1+US Inflation)

Obviously to calculate the percentage the 1+ thing is used but it is simply 

It implies that we are only taking a ratio of Local Inflation to US Inflation and then using the 10-year YTM on US Government bond and using that inflation ratio to calculate the Risk free rate in local currency. Quite simple to remember now!

1 comment:

  1. excellent piece of information, I had come to know about your website from my friend kishore, pune,i have read atleast 8 posts of yours by now, and let me tell you, your site gives the best and the most interesting information. This is just the kind of information that i had been looking for, i'm already your rss reader now and i would regularly watch out for the new posts, once again hats off to you!
    Thanx a lot once again,

    Free Valuation