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581 Words Jan 12th, 2012 3 Pages
1. Describe the structure of Royal Dutch/Shell Group. Does it differ from the equity listings of other companies that you know?

These equity listings are different from companies such as BP and Exxon. All subsidiary companies’ shares were held by the Group Holding Companies in the ratio of 60/40 (Royal Dutch/Shell). The corporate structure is outlined in the figure below.

Individuals and Institutions

Individuals and Institutions

Royal Dutch Petroleum Company Netherlands 60%

The “Shell” Transport and Co, PLC UK 40%

The Shell Petroleum Company LTD. UK

Shell Petroleum Inc.
USA

Shell Petroleum NV
Netherlands

Service Companies
Operating Companies
Shell Oil Company

USA

Individuals and Institutions
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Approximately 13.8% of the price differential in Europe for the Royal Dutch can be explained by market inefficiencies, and 11.71% for Shell in New York can be explained by the same reason.

4. Is there an arbitrage opportunity in the price differentials you identified? What kind of arbitrage transactions would you propose to exploit these opportunities?

Arbitrage opportunities exist in both Royal Dutch and Shell. To exploit the price differentials for Royal Dutch, one would buy shares in the European market (for $141.368) and sell them in the market in New York (for $141.375). To exploit the price differentials for Shell, one would buy shares in the European market (for $124.222) and sell them in the market in New York for ($126.554).

5. Calculate the net payoffs of the arbitrage transactions you suggested. Can such transactions enforce the market discipline?

The net payoff per share of the arbitrage transaction is $0.07 for Royal Dutch and $2.332 for Shell. Arbitrage can enforce market discipline because once the discrepancy in market prices is discovered the price discrepancy is quickly eliminated. This enables buyers avoid prices that will send them into bankruptcy. It also enables sellers to generate revenue (as opposed to losing money in a situation where arbitrage occurred.)

6. On the basis of your analysis and the findings presented in the case, what other suggestions would you propose to explain the observed phenomena? To what extent can

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