The current annual interest rates are 3.00 percent in the United States and 8.00 percent in Japan. The interest rates are continuously compounded. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot (t=0) rate is JPY 125 per one JPY. Suppose that, at time t=0, the one-year forward exchange rate in the currency market is USD 0.0081 per one JPY.

If there is an arbitrage opportunity, then what should be the FI's arbitrage strategy at time t=0 (now)?

S1) In the currency market, FI will enter into a forward exchange rate agreement, whereby, it will ["Buy", "Sell", "Do Nothing"] Japanese yen one-year from now.

S2) In the Japanese interest rate market, FI will ["Borrow", "Lend", "Do Nothing"] for one-year.

S3) In the currency market, FI will ["Buy", "Sell", "Do Nothing"] US dollar at the spot exchange rate.

S4) In the US interest rate market, FI will ["Borrow", "Lend", "Do Nothing"] for one-year.