The current spot rate for the Norwegian krone is $1 = NKr6.0888. The expected inflation rate in Norway is three % and in the U.S. four %. A risk-free asset in the U.S. is yielding six %. What risk-free rate of return should you expect on a Norwegian security?

Question

Quizplus · Accepted Answer

The expected risk-free rate in Norway can be calculated using the International Fisher Effect: (1 + i_Norway) = (1 + i_US) * (1 + inflation_Norway) / (1 + inflation_US). Solving gives approximately 5%.

The Current Spot Rate for the Norwegian Krone Is $1