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Arbitrage of ADRs On the Tokyo Stock Exchange, Honda Motor Company stock closed at 3,945 per share on Thursday, April 11, 2013. Honda trades as and...
Arbitrage of ADRs On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 per share on Thursday, April 11, 2013. Honda trades as and ADR on the NYSE. One underlying Honda share equals one ADR. On April 11, 2013, the ¥/$ spot exchange rate was ¥99.8270/$1.00.
a) At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?
b) By comparison, Honda ADRs traded at $39.97. Do you think an arbitrage opportunity exists?
c) If Honda ADRs were trading at $44 when the underlying shares were trading in Tokyo at ¥3,945, what could you do to earn a trading profit? Use the information in a) and b), above, to help you and assume that transaction costs are negligible.
