Dallas Co., an American company, needs to obtain S$1,800,000 in one year. The existing spot rate of the Singapore dollar is US$0.74 while the one-year forward rate of the Australian dollar is US$0.73. Dallas can buy one-year put options on the Singapore dollars with an exercise price of US$0.70 and a premium of US$0.015. Dallas can also buy one-year call options on the Singapore dollars with an exercise price of US$0.72 and a premium of US$0.02 per unit.

Dallas estimates the future spot rate of the Singapore dollar in one year would be US$0.75, US$0.73, and US$0.71 with the probabilities of 30%, 40%, 30%, respectively. The one-year investing and borrowing rates in the U.S. are 6% and 6.5%, respectively. While the investing and borrowing rates in Singapore are 7.5% and 8%, respectively.

Using the relevant information above, answer the questions below.

a) Compare the US dollar cost of obtaining the Singapore dollar if Dallas were to engage in the forward, money market, or options hedge

b) Calculate the US $ cost of the Singapore dollar if Dallas were to unhedged its forex exposure [6 marks]

Note: You should type in your calculations in the response box below

c) Should Dallas hedge its transaction exposure?Explain your answer