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?

Question

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Hudson

6 November, 18:44

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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Brooks Wiley · Answer 1

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%