This morning, Costco Wholesale Co. purchased imports that have a price of 500,000 Singapore dollars (SGD) and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on SGD at 0.712 U.S. dollar (USD) or purchase a call option contract on SGD at a premium of 0.015 USD per unit with an exercise price of 0.712 USD to cover its payables. The spot rate of the SGD was 0.712 USD. At noon, the Monetary Authority of Singapore (MAS) announced changes to its exchange rate policy that caused interest rates in Singapore to increase from 2.0% to 2.5%; while there was no change in interest rates in the U.S. at 5.0%. These actions immediately increased the degree of uncertainty surrounding the future value of the SGD over the next 90 days. Assume the spot rate of SGD remained at 0.712 USD throughout the day when MAS made its announcement. (a) Suppose that Costco is convinced that the SGD will definitely appreciate substantially over the next 90 days. Would a call option hedge or forward hedge be more appropriate given its opinion? Justify your answer. (8 marks) (b) Suppose that Costco uses a currency options contract to hedge SGD rather than a forward contract. If Costco purchased a currency call option contract at the money on SGD this afternoon (i.e., after the MAS's announcement), would its total USD cash outflows be more than, less than, or the same as the total USD cash outflows if it had purchased a currency call option contract at the money this morning (i.e., before the MAS's announcement)? Explain. This morning, Costco Wholesale Co. purchased imports that have a price of 500,000 Singapore dollars (SGD) and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on SGD at 0.712 U.S. dollar (USD) or purchase a call option contract on SGD at a premium of 0.015 USD per unit with an exercise price of 0.712 USD to cover its payables. The spot rate of the SGD was 0.712 USD. At noon, the Monetary Authority of Singapore (MAS) announced changes to its exchange rate policy that caused interest rates in Singapore to increase from 2.0% to 2.5%; while there was no change in interest rates in the U.S. at 5.0%. These actions immediately increased the degree of uncertainty surrounding the future value of the SGD over the next 90 days. Assume the spot rate of SGD remained at 0.712 USD throughout the day when MAS made its announcement. (a) Suppose that Costco is convinced that the SGD will definitely appreciate substantially over the next 90 days. Would a call option hedge or forward hedge be more appropriate given its opinion? Justify your answer. (8 marks) (b) Suppose that Costco uses a currency options contract to hedge SGD rather than a forward contract. If Costco purchased a currency call option contract at the money on SGD this afternoon (i.e., after the MAS's announcement), would its total USD cash outflows be more than, less than, or the same as the total USD cash outflows if it had purchased a currency call option contract at the money this morning (i.e., before the MAS's announcement)? Explain