Question

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The expected inflation rate in Norway is 6 percent and in the U.S. it is 3.1 percent. A risk-free asset in the U.S. is yielding 4 percent. What risk-free rate of return should you expect on a Norwegian security?

A.4.5 percent
B.4.0 percent
C. 6.9 percent
D. 5.0 percent
E. 3.5 percent

Answer 1

The correct answer is option C.

Step-by-step explanation:

The current spot rate for the Norwegian kroner is $1 = NKr6.6869.

The expected inflation rate in Norway is 6 percent and that in the US is 3.1%.

The risk-free rate of return in the US is 4%.

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

4% - 3.1% = Risk free rate - 6%

Risk free rate in Norway = 0.9% + 6%

Risk free rate in Norway = 6.9%