AB's year-end is on December 31. On October1, year 9 when the U.S. dollar was worth CDN$1.365, AB sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, year 10. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250.

In order to minimize its Foreign Exchange risk and exposure, AB entered into a forward contract with its bank on December 1, year 9 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, year 9 to March 1, year 10 was CDN$1.34. On March 1, year 10, AB received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.

Significant dates and exchange rates pertaining to this transaction are as follows:

Spot RatesForward Rates*October 1, year 9 (Transaction date)US$1 = CDN$1.365December 1, year 9 (Hedged date)US$1 = CDN$1.3450US$1 = CDN$1.3250December 31, year 9 (Year-end)CDN$1.36CDN$1.34March 1, year 10 (Settlement date)US$1 = CDN$1.368.US$1 = CDN$1.368.

*for contracts expiring on March 1, year 10

What is the amount of the discount on the forward contract?

1. CDN$1,000
2. CDN$1,500
3. CDN$3,000
4. CDN$6,000

How much (in Canadian Dollars) will AB expect to receive from the bank when its forward contract is settled?

$397,500

$403,500

$402,000

$409,500