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?
Step by Step Answer:
International Financial Management
ISBN: 9780077861605
7th Edition
Authors: Cheol Eun, Bruce Resnick