solution
solution.
On the Tokyo Stock Exchange, Honda Motor Company stock closed at #3,207 per share on Monday, May 6, 2019. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On May 6, 2019, the ¥$ spot exchange rate was ¥111.07/$1.00. If Honda ADRs were trading at $35, what could you do to earn a trading profit? Use the information in problem 1, above, to help you and assume that transaction costs are negligible.
O Both options are not true.
O The no-arbitrage ADR U.S. dollar price is $35. If Honda ADRs were trading at $35, a wise investor might sell short the relatively overvalued ADRs. Since the ADRs are a derivative security, one would expect the ADRs to increase in price.
O Both options are true.
O If Honda ADRs were trading at $35, a wise investor might sell short the relatively overvalued ADRs. Since the ADRs are a derivative security, one would expect the ADRs to decrease in price from $35 to $28.87. Assuming this happens, the position could be liquidated for a profit of $35 – $28.87 = $6.13 per ADR.
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