Assume the current spot rate for the Norwegian krone is $1 = NKr7.9323,the expected inflation rate in Norway is 2.1 percent and 1.2 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 3.7 percent.What nominal risk-free rate of return should you expect on a Norwegian security?

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The expected nominal 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 the expected difference in their inflation rates. According to the IFE, the formula is: $$ i_{Norway} = i_{US} + (Inflation_{Norway} - Inflation_{US}) $$Given that $ i_{US} = 3.7\% $, $ Inflation_{Norway} = 2.1\% $, and $ Inflation_{US} = 1.2\% $, we can substitute these values into the formula:$$ i_{Norway} = 3.7\% + (2.1\% - 1.2\%) = 3.7\% + 0.9\% = 4.6\% $$Therefore, the expected nominal risk-free rate of return on a Norwegian security should be 4.6 percent.

Assume the Current Spot Rate for the Norwegian Krone Is