The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inﬂation rate in Norway is 3 percent and in Canada 2 percent. A risk-free asset in Canada is yielding 4.5 percent.
What real rate of return should you expect on a risk-free Norwegian security?

Question

Quizplus · Accepted Answer

To calculate the real rate of return on a risk-free Norwegian security, we need to adjust the nominal rate of return for inflation. The nominal risk-free rate in Norway can be calculated as follows: 6.83%*(1+3%) = NKr 7.04. Now, we need to convert this into Canadian dollars using the current spot rate: NKr 7.04/$1 = $0.1418/NKr. So, the nominal risk-free rate in Canada is 4.5%. The real risk-free rate in Norway can be calculated as follows: (1+7.04%)/(1+3%) - 1 = 5.5%. Therefore, the correct answer is C.

The Current Spot Rate for the Norwegian Krone Is $1