a. The current spot exchange rate is 1.213 Euros per British Pound. The one-year forward rate is 1.2777/. The one-year interest rate for the Euro is 3% and 2.6% for the British Pound. You can borrow at most 1,000,000 or the equivalent amount in Pounds at the current exchange rate. i. If you are a Euro-based investor, what is the arbitrage profit you can make given the above information? [5 marks] ii. If you are a British-based investor, what is the arbitrage profit you can make in British Pounds? [5 marks] ii. Why is it possible to obtain an arbitrage profit? Explain illustrating your answer with the relevant formulae. [2 marks] iv. Using the appropriate formulae, discuss how, in a world of perfect capital markets, equilibrium will be restored as a result of the above transactions in parts (i) and (ii). [2 marks] According to the equilibrium conditions above, what is the predicted effect of an increase in the foreign interest rate on the domestic exchange rate? Explain. [1 marks)