The current spot rate for the Norwegian krone is $1 = 6.5483NKR. The expected inflation rate in Norway is 2.4 % and in Canada 3.7 %. A risk-free asset in Canada is yielding 4.3 %. What real rate of return should you expect on a risk-free Norwegian security?

Question

Quizplus · Accepted Answer

The real rate of return can be calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). The nominal rate in Norway can be derived from the Canadian rate adjusted for inflation differences: 4.3% - (3.7% - 2.4%) = 3.0%.

The Current Spot Rate for the Norwegian Krone Is $1