1. Suppose the 1-year nominal interest rate in Zooropa is 9%, and Zooropa's expected inflation rate is 4%. What is the real interest rate in Zooropa?

2. You were recently hired by the Doolittle Corporation corporate treasury to help oversee its expansion into Europe. Blake Francis, the CFO, wants to hire a foreign exchange forecasting company. Blake has asked you to evaluate three different companies, and he has obtained information on their past performances. Out of a total of 50 forecasts for the tiny_mce_markergt;: rate, the companies reported the number of times they correctly forecast appreciations and depreciations: in Zooropa and the growing importance of specu- lative pressures in Zooropa's currency markets last week suddenly made him suspicious about the possibility of realignments within the system. He even doubted the long-term viability of the system. Cab instructed Fad to examine the following issues:

Correct Down

Forecasts

Correct Up

Forecasts

Morrissey Forex Advisors              20                          5

Pixie Exchange Land                     20                          4

FOREX Cures                               12                        12

There are a total of 35 dollar appreciations (down periods) and 15 dollar depreciations (up peri- ods) in the sample. Blake wants to know two things:

a. Can anything be said about the companies' forecasting ability with the available data?

b. What additional information should Blake try to obtain in order to form a better judgment?