Thursday, May 27, 2010
What IS risk-free?
Risk-free rates can be quite complex; perhaps more than they need to be.
I'm a US-based investor. My risk-free rate is the U.S. Treasury bill. I can put my money there or invest in something more risky, such as Vietnam equities. Vietnam, to my knowledge, has no risk-free rate. But why should I care; would I invest in them? No, if I'm looking for a risk-free rate it's treasuries.
Well, what about the investor in Vietnam; what if he's your client, what do you show? I'd pick a risk-free rate that this investor could invest in; since there is no rate for Vietnam, perhaps one from Australia, the UK, or the USA? Pick something that could be used, but don't look for a collection of rates, one per country. The rationale behind this is lost on me. If you have a good argument for it, let me know.