Suppose that in the fixed-income securities market, the current one-year and two-year spot interest rates are 10.000% and 8.500%, respectively. (That is, R_0,1 = 10.000% and R_0,2 = 8.500%) . In addition, in the market, the current one-year forward rate one-year from now (F^0,Mrkt_1,1) is 7.500%.

What should be an arbitragers strategy at t = 0 ? (Borrowing is equivalent to taking a loan; whereas, Lending is equivalent to invest / deposit.)

S1) Enter into a forward rate agreement, whereby, they will [Borrow Land Do Nothing] at one-year forward rate one year from now.

S2) They will [Borrow Land Do Nothing] at one-year spot rate.

S3) They will [Borrow Land Do Nothing] at two-year spot rate.