Assume that the Rome Electricity Company (REC) wants to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for €30.00 per share, and the current dollar/euro exchange rate is $1.2500/€. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $75 per share (or per ADR).
a. Describe the precise steps ABT must take to create an ADR issue meeting REC’s preferences.
b. Suppose REC’s stock price rises from €30.00 to €33.00 per share. If the exchange rate does not change, what will happen to REC’s ADR price?
c. If the euro appreciates from $1.2500/€ to $1.2900/€, but the price of REC’s shares remains unchanged in euros, what will happen to REC’s ADR price?