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!
No comments:
Post a Comment