Suppose that in the fixed-income securities market, the one year, two-year and three-year spot interest rates are 6.00%, 6.25% and 7.00%, respectively. That is, Ro.1 = 6.00% and Ro.2 = 6.25% and Ro.3 = 7%.) In addition, in the one-year forward interest rate market, the one-year foward rate two-years from now (F2,1) is 8.00% .

What should be the arbitrager's strategy at t=0?

1) Enter into a forward rate agreement, whereby, you will ______ (Borrow, Lend, Do Nothing) at one-year forward rate two-years from now.

2) ______ (Borrow, Lend, Do Nothing) at one-year spot rate.

3)_______ (Borrow, Lend, Do Nothing) at two year spot rate.

4) _______ (Borrow, Lend, Do Nothing) at three year spot rate.