On the Tokyo Stock Exchange, Honda Motor Company stock closed at 1,570 per share on November 24, 2023. Honda is also traded as ADR on the New York Stock Exchange. After October 1, 2023, the ratio of Honda's ADRs to underlying shares is 1 ADR = 3 Shares. On November 24, 2023, the /$ spot exchange rate was 149.46/$.

a. At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR of Honda on NYSE? b. Find Honda ADR's price on November 24. Do you think an arbitrage opportunity exists?

2. A U.S. MNC desires to finance a project undertaken by its Japanese subsidiary. This five-year project has a cost of 1,350,000,000. At the current exchange rate 135/$, the parent firm could raise $10,000,000 in the U.S. capital market by issuing 5-year bonds at 2.5%. An alternative is for the U.S. firm to raise 1,350,000,000 in the international bond market by issuing yen- denominated bonds for a term of five years at rate 4%. A Japanese MNC of equivalent creditworthiness would like to finance a U.S. project, in need of $10,000,000. The Japanese firm could raise 1,350,000,000 in domestic market at a fixed rate of 3% and convert the funds to dollars. The firm could also issue dollar-denominated bonds at the rate of 3.5%.

a. Develop a currency swap that benefits both firms. b. Analyze the cash flows of the U.S. firm and the Japanese firm in this swap, and calculate the net cost of borrowing and the savings for each firm. c. What is the contractual exchange rate on each settlement date prior to the debt retirement? What is the contractual exchange rate at the debt maturity date?

Answer rating: 100% (QA)

Honda ADR Pricing and Arbitrage Opportunity a NoArbitrage US Dollar Price 1 Three Honda shares trade for one ADR 2 The share price in Tokyo is 1570 3 ... View the full answer