In the London market, Rolls Royce stock closed at £0.875 per share on Thursday, April 17, 2003. Rolls Royce trades as an ADR in the OTC in the United States. Five underlying Rolls Royce shares are packaged into one ADR. On April, 17, 2003, the British Pound sterling to the U.S. spot exchange rate was £0.6366/$1.00.
-Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share)are trading for $40 on the New York Stock exchange.The current exchange rate is SF1/$ and a trader has $10,000 or the equivalent in SF.How much arbitrage profit can the trader make?
A) $200
B) $1250
C) $2500
D) No profit can be made

Question

Quizplus · Accepted Answer

Use $10,000 to buy 10,000/40 = 250 ADRsExchange ADRs for 250/4 = 62.5 sharesSell shares for 62.5 x 200SF = SF 12,500Exchange SF back to US$ for $12,500Profit: $12,500 - $10,000 = $2,500

In the London Market, Rolls Royce Stock Closed at £0