Calculation Question:

1.Citadel Co. will receive $400,000 Canadian dollars in 6 months. Assume the annual interest rate of borrowing or lending Canadian dollar is 3% and the interest rate of borrowing or lending U.S. dollar is 2%.

(1)If the spot rate of Canadian dollar is $0.95, how should the firm use the international money market to hedge the transaction exposure of the receivable transaction? Explain each step of the hedging strategy. How much U.S. dollar will the company receive in the end of the 6 months?

(2)If the financial market is efficient and there is no transaction cost, what should be the 6-month forward rate of Canadian dollar?