Covered versus uncovered interest arbitrage

On June $5,$ Lorenzo, an American investor, decided to buy six$-$month Treasury bills. He found that the per$-$annum interest rate on six$-$month Treasury

bills is $7\mathrm{.}00\%$ in New York and $11\mathrm{.}00\%$ in Frankfurt, Germany. Based on this information and assuming that tax costs and other transaction costs are

negligible in the two countries, it is in Lorenzo's best interest to purchase six$-$month Treasury bills in

earn

more for the six months.

On June $5,$ the spot rate for the euro was $$0\mathrm{.}820,$ and the selling price of the six$-$month forward euro was $$0\mathrm{.}822.$ At that time, Lorenzo chose to

ignore this difference in exchange rates. In six months, however, the spot rate for the euro fell to $$0\mathrm{.}818$ per euro.

When Lorenzo converted the investment proceeds back into U$.$S$.$ dollars, his actual return on investment was

As a result of this transaction, Lorenzo realizes that there is great uncertainty about how many dollars he will receive when the Treasury bills mature.

So$,$ he decides to adjust his investment strategy to eliminate this uncertainty.

What should Lorenzo's strategy be the next time he considers investing in Treasury bills?

Exchange half of the anticipated proceeds of the investment for domestic currency.

Contract in the forward market to sell the foreign currency in the amount of the proceeds from the investment.

Avoid investment in foreign institutions.

Had Lorenzo used the covered interest arbitrage strategy on June $5,$ his net return on investment $($relative to purchasing the U$.$S$.$ Treasury bills$)$ in

German six$-$month Treasury bills would be