please give detailed explanation.

10. Assume that the interest rate is 16% on pounds sterling and 7% on euros. At the same time, inflation is running at an annual rate of 3% in Germany and 9% in England. a. If the euro is selling at a one-year forward premium of 10% against the pound, is there an arbitrage opportu- nity? Explain. b. What is the real interest rate in Germany? In England? c. Suppose that during the year the exchange rate changes from 1.8 : l to 1.77 : 1. What are the real costs to a German company of borrowing pounds? Contrast this cost to its real cost of borrowing euros. d. What are the real costs to a British firm of borrowing euros? Contrast this cost to its real cost of borrowing pounds. 160 10. Assume that the interest rate is 16% on pounds sterling and 7% on euros. At the same time, inflation is running at an annual rate of 3% in Germany and 9% in England. a. If the euro is selling at a one-year forward premium of 10% against the pound, is there an arbitrage opportu- nity? Explain. b. What is the real interest rate in Germany? In England? c. Suppose that during the year the exchange rate changes from 1.8 : l to 1.77 : 1. What are the real costs to a German company of borrowing pounds? Contrast this cost to its real cost of borrowing euros. d. What are the real costs to a British firm of borrowing euros? Contrast this cost to its real cost of borrowing pounds. 160