Question

5) If the economy is getting stronger, EXPLAIN what will happen to the “Spread”? Use an example!

6) If Sony stock is trading for $100/share on the Tokyo exchange and $98/share on the New York Stock Exchange (NYSE), what would you do?

Answer 1

5 If a economy is getting stronger,then the credibility of country improves and which in result reduce the risk related to country and thus we can conclude that spead reduces with economy becoming stronger.

Example:- How industrilisation changed the economy of country (i.e economy become stronger by industrilisation ) (source :- Investopedia)

Economic and historical research has overwhelmingly showed that industrialization is linked to rising educations, longer life spans, growing individual and national income, and improved overall quality of life.

For example, when Britain was industrializing, total national income increased by more than 600% from 1801 to 1901. By 1850, workers in the U.S. and Great Britain earned an average of 11 times than workers in non-industrialized nations.

These effects have proven to be permanent and cumulative. By 2000, per capita income in fully industrialized countries was 52 times greater than in non-industrial countries. Industrialization disrupts and displaces traditional labor, encouraging workers towards more valuable and productive activity that is accompanied by better capital goods.

Thus,Industralisarion makes country stronger and reduces spread.

6 we will do arbitrage in such a situation because same share is traded at different value.

so, we will buy the share from where share is cheap available and sell the share in other country at premium.

we will buy share at 98 on new york stock exchange and sell the share at 100 on tokyo exchange.

Arbitrage profit is $ 2 (100-98)

Note:-

we are assuming no transaction cost ,currency fluctuation risk and other expenses.