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17 April, 20:36

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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  1. 17 April, 22:11
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    I expect 4.6% Risk-free rate of return on a Norwegian security.

    Explanation:

    Spot rate = NKr5.9433 per $

    US

    Risk Free Rate = 3.2%

    Inflation rate = 1.7%

    Norway

    Risk Free Rate = ?

    Inflation rate = 3.1%

    As we know

    Real rate is the same globally

    Real rate = Risk free rate - Inflation rate

    Real Rate of US = Real Rate of Norway

    US Risk free rate - US Inflation rate = Norway Risk free rate - Norway Inflation rate

    3.2% - 1.7% = Norway Risk free rate - 3.1%

    1.5% = Norway Risk free rate - 3.1%

    Norway Risk free rate = 3.1% + 1.5%

    Norway Risk free rate = 4.6%
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