To exploit the arbitrage opportunity on the Polish government bond, in addition to the first step, Knizek should:
A borrow at the risk-free rate and buy the underlying bond.
B borrow at the risk-free rate and short sell the underlying bond.
C short sell the underlying bond and invest the proceeds at the risk-free rate.
解析：
A.Incorrect because the arbitrage transactions when the forward price is too low involve short selling (not buying) the underlying bond and investing (not borrowing) the proceeds at the risk-free rate.
B.Incorrect because short selling of the underlying bond is a necessary step in the reverse carry arbitrage strategy (when the forward price is below its no arbitrage value), but the proceeds should be invested not borrowed.
C.Correct because as the forward price is below its no-arbitrage value, Knizek can implement a reverse carry arbitrage strategy to obtain a risk-free profit. The arbitrage transactions when the forward price is too low—that is, F0 < FV(S0)—involve the following three steps:
Step 1: Buy the forward contract on the underlying
Step 2: Sell the underlying short
Step 3: Lend the short sale proceeds
