On May 1, the one-month T-bill rate is 4.0% and the two-month T-bill is 5.0%. Assume that fed funds futures contracts trade at a 25 basis point rate under one-month T-bill rate at the start of the delivery month. The June fed funds futures is quoted at 94.75. Assuming no basis risk between fed funds and one-month T-bill at the start of the delivery month. Assume that one-month T-bill rate on June 1 was 7%. Contract size is $5,000,000. You are going to use a cash and carry arbitrage strategy to identify whether an arbitrage opportunity is available. Be sure to illustrate the arbitrage strategy for one contract.

On June 1, what cash-carry transactions will you take?

Group of answer choices

Buy one June Fed funds futures contract; repay the two-month T-bill rate loan; sell the one month T-bill

Sell one June Fed funds futures contract; borrow at two-month T-bill rate; buy the one month T-bill

Sell one June Fed funds futures contract; borrow at one month T-bill rate; buy the two-month T-bill

Buy one June Fed funds futures contract; repay the one month T-bill rate loan; sell the two-month T-bill