If Honda ADRs were trading at $44 when the underlying shares were trading in Tokyo at 3,945,

Question:

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 problem 1 to help you, and assume that transaction costs are negligible.

Data from in problem 1

On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 per share on Thursday, April 11, 2013. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On April 11, 2013, the ¥/$ 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?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  answer-question

International Financial Management

ISBN: 9780077861605

7th Edition

Authors: Cheol Eun, Bruce Resnick

Question Posted: