The reality of risk-free

Warnings over the stability of the UK's AAA rating by Standard & Poor's in May have caused analysts to question whether other AAA rated sovereigns - including the US - are at risk of downgrades, given ballooning debt levels. What implications does this have for the concept of a risk-free rate, used as a basis for derivatives pricing? By Duncan Wood

For critics of the UK's ruling Labour party, the May 21 decision by Standard & Poor's (S&P) to slap a negative outlook on the country's cherished AAA credit rating was an opportunity to make hay. Right-wing tabloids branded it a national humiliation and ran pictures of the Queen looking less than amused. The opposition Conservatives repeated their calls for a general election. The political hullaballoo was attention-grabbing, but, a day later, the spotlight had moved on. In contrast, the denting