For example, if the operations are in Belguim, do we use the Belguim bond or the German bond as it's the most risk free bond in the euro area?
Is There a European Risk Free Rate?
There are many factors to consider when determining a risk free rate. In general, you would use a long-term government bond of the country in which the business is located. Other ways of choosing a risk free rate include:
- If no local treasury bond, then US Treasury rate plus a country risk premium
- Euro area yield curve for AAA rates countries published by ECB
- 10 years German bund
- If 10 year German bund does not reflect the economic reality, you can use the pre QE 5 or 10 year average or do a forward looking average using the yield curve plus a premium
- Consider the US T-bill with an appropriate premium based on a CDS spread on German/Belgian Sovereign debt
Overall, it depends on what you are trying to measure and assess.