The current spot rate for the Norwegian krone is $1 = 6.5483NKR. The expected inﬂation rate in Norway is 1 percent and in Canada 3.8 percent. A risk-free asset in Canada is yielding 4.5 percent.
What risk-free rate of return should you expect on a Norwegian security?

Question

Quizplus · Accepted Answer

According to the International Fisher Effect, the difference in nominal interest rates between two countries is approximately equal to the difference in their expected inflation rates. The expected inflation rate difference is 3.8% - 1% = 2.8%. The Canadian risk-free rate is 4.5%, so the expected Norwegian risk-free rate should be 4.5% - 2.8% = 1.7%.

The Current Spot Rate for the Norwegian Krone Is $1