Suppose you observe that 90day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90day forward rate on the euro are both $1.25. You have $700,000 that you wish to use in order to engage in covered interest arbitrage.

Which of the following best describes covered interest arbitrage?

_Using forward contracts to mitigate exchange rate risk, while attempting to capitalize on higher interest rates in a particular country

_Using forward contracts to mitigate interest rate risk, while attempting to capitalize on equal interest rates across countries

_Using forward contracts to mitigate default risk, while attempting to capitalize on equal interest rates

_Using forward contracts to mitigate default risk, while attempting to capitalize on higher interest rates in a particular country