The current spot rate for the Norwegian krone is $1 = NKr6.0888. The expected inﬂation rate in Norway is six percent and in the U.S. ﬁve percent. A risk-free asset in the U.S. is yielding 7.5
Percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

Question

Quizplus · Accepted Answer

The real rate of return can be approximated by subtracting the inflation rate from the nominal interest rate. Since the nominal rate is not given for Norway, we use the Fisher equation: real rate ≈ nominal rate - inflation rate. Assuming the nominal rate in Norway is similar to the U.S. rate (7.5%), the real rate is approximately 7.5% - 6% = 1.5%. However, considering the inflation differential, the expected real rate is closer to 2.5%.

The Current Spot Rate for the Norwegian Krone Is $1