You are the manager at a U.S based firm that exports parts to Canada. Your boss asked you to generate a forecast on the Canadian dollar for the next year to help them complete the capital budgeting report. Assume that the Canadian dollar is a free floating currency. Suppose that you found the following information from the WSJ and the IMF web sites .

Spot rate of Canadian dollar = $0.895

Yield on 10 year Canadian bond = 2.0%

Yield on 10 year U.S. Treasury bond = 2.3%

Based on the information that you found and assuming that you believe the International Fisher effect holds (IFE), what will be the value of the Canadian dollar in one year? What is the reasoning behind your answer? Explain the forces that cause the exchange rate to change in the direction you predicted. Given your forecast, how should your firm's cash flows be affected by this change in the exchange rate? Why? Explain. Would you recommend hedging for your MNC? If yes, what type? why? If you need additional information to decide, what information would you need to gather to decide on whether and how to hedge? Show all your work and explain your reasoning. Your explanation determines your grade.