Using only the data in Exhibit 1, which country will Simmons most likely expect to have the highest average real short-term risk-free interest rates over the forecasted horizon?
- Germany
- US
- UK
Please share the calculation and logic behind the solution.
Estimated Q3 growth is consistent with 10 year growth for all countries but standard deviation for Germany is high among all, so short term rates will be high for Germany.
Hope it helps.
Real short-term risk-free interest rates will be high for the country that has higher GDP growth and higher GDP volatility. Over the forecasted horizon of 10 years, Germany satisfies both these conditions. No calculations required.