Suppose the current spot rate for the Norwegian krone is NKr5.9433 while the expected inflation rate in Norway is 3.1 percent and 1.7 percent in the U.S. A risk-free asset in the U.S. is yielding 3.2 percent. What risk-free rate of return should you expect on a Norwegian security?

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The expected risk-free rate of return on a Norwegian security can be calculated using the International Fisher Effect (IFE), which suggests that the expected difference in the nominal interest rates between two countries is approximately equal to their expected inflation rate differential. The formula for IFE is:$$ i_{Norway} = i_{US} + (Inflation_{Norway} - Inflation_{US}) $$Given that $ i_{US} = 3.2\% $, $ Inflation_{Norway} = 3.1\% $, and $ Inflation_{US} = 1.7\% $, we can substitute these values into the formula:$$ i_{Norway} = 3.2\% + (3.1\% - 1.7\%) = 3.2\% + 1.4\% = 4.6\% $$Therefore, the expected risk-free rate of return on a Norwegian security should be 4.6 percent.

Suppose the Current Spot Rate for the Norwegian Krone Is