A Canadian pharmaceutical company is about to release a new pill that will have its price fixed at 4 Canadian dollars, and will remain fixed at this price for the next two years. Of course, Canadians will be able to buy this pill for their own use in their domestic currency. Americans can also buy this drug, and neither the US nor Canadian government will impose any transaction costs if the drug is imported to the US. The only uncertainty will come in the form of the exchange rate for US citizens wishing to purchase the drug, as it is sold in Canadian currency only. The exchange rate, that is the price of a Canadian dollar in terms of US dollars, at time n is modeled as the stochastic process {X_n}_n greaterthanorequalto 0, where X_0 = 1 P[X_n + 1 = 1.25 X_n] = 1/2 = P[X_n + 1 = 0.8 X_n]. Assume that the yearly US interest rate is maintained at r = 0.03. Is there an interest rate r_c, tied to the US interest rate r, that the Bank of Canada can set to eliminate arbitrage opportunities? What are the 1-year and 2-year forward prices, in US dollars, of a pill delivered to a US customer