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Author Topic: 2012-10-22 thestreet.com -Central Bank Credit Risk and a New Risk-Free Benchmark  (Read 787 times)
finway
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October 22, 2012, 04:16:14 PM
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http://www.thestreet.com/story/11743671/1/central-bank-credit-risk-and-a-new-risk-free-benchmark.html


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The inflation expectation curve and the FX forward curve are both observable, at least for major currencies. Calculating the true credit-risk-free curve becomes a simple exercise in subtraction. The interest rate parity is not broken by this transformation. Instead, it's cast under a new, clearer interpretation: Currency credit risk can and should be quantified explicitly.

There is one problem remaining, however. FX rates are all relative; thus the credit-risk-free curves derived this way are also relative. An obvious choice for the common reference asset is gold, although it's not perfect since the supply is not exactly constant.

Bitcoin is perfect, since the supply is rigidly defined by mathematics. Unfortunately we are still a long way from accepting bitcoins as a common reference. Until then, a new gold standard could be established as the common reference, the true credit-risk-free asset against which all currency credit risk is determined and the corresponding true credit-risk-free rate is calculated.

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TraderTimm
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October 22, 2012, 09:58:17 PM
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Interesting, a bit surprised to see something like this on thestreet.com, a lot of investors read that site. Guess it is just one more datapoint of bitcoin being exposed to more people.

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