The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inflation rate in Norway is 2 percent and in the U.S. 4 percent. A risk-free asset in the U.S. is yielding 5 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 for a Norwegian security, we need to adjust the U.S. risk-free rate of return by the inflation differential between Norway and the U.S. The inflation differential is (4% - 2%) = 2%.

The adjusted U.S. risk-free rate of return is 5% - 2% = 3%.

Therefore, the expected risk-free rate of return on a Norwegian security is 3%. The best choice is B.

The Current Spot Rate for the Norwegian Krone Is $1