Question

Why are global interest rates so low? Also describe the difference between real and nominal interest rates.

Briefly describe the difference between real world and risk-neutral pricing.

Answer 1

Global interest rates are very low because of the pandemic which has unfolded in the entire Global arena and due to which the growth of global economy has completely Shattered and the central banks of different countries has came forward in order to decrease their interest rates in order to stimulate the economy & the Global interest rates are very low to counter the adverse effect of coronavirus which can even cause an impending recession as predicted by many experts.

Real interest rate are are not accounting for inflation where as nominal interest rates will be accounting for inflation so nominal interest rate will include the inflation in its rate whereas real interest rate will be the interested without any kind of inflation.

risk neutral pricing will mean that the pricing in which the risk has already been adjusted and real-world pricing will be all such pricing in which the risk has not been accounted, so risk-neutral pricing will be adjusting itself for all such risk present in the Global Arena whereas real-world pricing does not account for Risk and it will be not discounting risk in the pricing.