Suppose that in the fixed-income securities market, the current one-year and two-year spot interest rates are 4.000% and 5.500%, respectively. (That is, R^Mrkt_0,1 = 4.000% and R^Mrkt_0,2 = 5.500%). In addition, in the market, the current one-year forward rate one-year from now (F^0,Mrkt_1,1) is 6.000%.

What should be an arbitragers strategy at t = 0 (now)?

(Borrowing is equivalent to taking a loan; lending is equivalent to investing / depositing.)

S1) They will 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.