On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 pershare on Thursday, April 11, 2013. Honda trades as and ADR on the NYSE. One underlying Honda share equals one ADR. OnApril 11, 2013, the ¥/$ spot exchange ratewas ¥99.8270/$1.00. a. At this exchangerate, what is the no-arbitrage U.S. dollarprice of one ADR? b. By comparison, Honda ADRS traded at $39.97. Do you think an arbitrage opportunity exists?

Information provided: Honda stock price = 3,945 Spot exchange rate = 99.827/$1.00 ADR: When a…

Answered: was ¥99.8270/$1.00. a. At this exchange…

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, Hon da ADRS traded at $39.97. Do you think a n arbitrage opportunity exists?

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter13: Corporations: Organization, Stock Transactions, And Dividends

Section: Chapter Questions

Problem 4CP

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Concept explainers

Instruments of Foreign Exchange Market

Foreign exchange is a worldwide market in which one nation’s currency is converted into another nation’s currency. In further terms, exchanging of nations currency with foreign currencies. Foreign exchange happens at a specified rate which is termed the foreign exchange rate. The exchange rates are not constant continuously changing as they are derived by market forces of supply and demand. Widely used foreign currencies are the United States- dollar, Euro, Japanese Yen, British pound, and Australian dollar. US- dollar is the most denominated foreign currency. The Euro to US dollar is a widely used currency pair in the forex market as these two currencies represent the world’s enormous economy. Forex trade is simple as exchanging currencies at the bank. The main players of forex markets are the central banks, financial institutions, intermediaries, investments banks, and other banks. Central Bank is the supreme player who decides the currency value of their own nation on the forex market. Mostly foreign exchange-traded at FX market (forex market) when tourists’ visits a foreign country, import, and export happens between two countries.

Question

On the Tokyo Stock Exchange, Honda Mo
tor Company stock closed at ¥3,945 per
share on Thursday, April 11, 2013. Honda t
rades as and ADR on the NYSE. One und
erlying Honda share equals one ADR. On
April 11, 2013, the ¥/$ spot 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, Hon
da ADRS traded at $39.97. Do you think a
n arbitrage opportunity exists?

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