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

Question

Quizplus · Accepted Answer

To calculate the risk-free rate of return on a Norwegian security, we use the Fisher effect formula which is:
(1+R)= (1+ r)(1+h) 
where
R = the risk-free rate in Norway
r = the risk-free rate in the US = 6%
h = expected inflation rate in Norway - expected inflation rate in the US = 3% - 4% = -1%
Substituting the values and solving for R, we get:
(1 + R) = (1 + 0.06)(1 - 0.01)
(1 + R) = 1.05
R = 5%
Therefore, the answer is D) 5 percent.

The Current Spot Rate for the Norwegian Krone Is $1