Covered versus uncovered interest arbitrage

On May $31,$ Felix, an American investor, decided to buy three$-$month Treasury bills. He found that the per$-$annum interest rate on three$-$month

Treasury bills is $7\mathrm{.}00\%$ in New York and $9\mathrm{.}00\%$ in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are

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

$,$ because it allows him to earn

more for the three months.

On May $31,$ the spot rate for the yen was $$0\mathrm{.}100,$ and the selling price of the three$-$month forward yen was $$0\mathrm{.}099.$ At that time, Felix chose to ignore

this difference in exchange rates. In three months, however, the spot rate for the yen rose to $$0\mathrm{.}102$ per yen.

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

As a result of this transaction, Felix 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 Felix's strategy be the next time he considers investing in Treasury bills?

Exchange large amounts of domestic currency for foreign currency.

Sell enough foreign currency on the forward market to match the anticipated proceeds from the investment.

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

Had Felix used the covered interest arbitrage strategy on May $31,$ his net return on investment $($relative to purchasing the U$.$S$.$ Treasury bills$)$ in

Japanese three$-$month Treasury bills would be

$.($Note: Assume that the cost of obtaining the cover is zero.$)$