Do not cancel. The guest MUST cancel. Then whatever cancellation policy you have will come into effect. It is very simple, guest cancels, you get paid.
If YOU cancel, you will pay a fine, have a blocked calendar, be punished in searches and the guest will be paid in full with also a small reward for having a host who so cruelly cancels on them this late in time.
if the guest insists thay you cancel it is only because they will get their booking fees refunded as well if you cancel, so they can only win. Do not.