Question

In: Finance

You are a U.S. investor and wish to buy 10,000 shares of XYZ Inc. You can...

You are a U.S. investor and wish to buy 10,000 shares of XYZ Inc. You can

buy them on the Paris Stock XC or on London Stock XC. You ask the brokers

to quote you net prices (no commissions paid). There are no taxes on foreign shares listed

in London. Here are the quotes:

London (Pound) 56.75 - 57.25

Paris (Euro) 78.5 - 78.75

(Dollars per Pound) 1.5000 - 1.5040

(Euro per dollar) 0.91100 - 0.91200

a. What is your total dollar cost if you buy the XYZ Inc shares at the cheaper

place?

b. Are there arbitrage opportunities between London and Paris? Explain.

Please solve in Excel

Please show cells for working

Expert Solution

a]

total dollar cost in London = ask price in pounds * ask rate of Dollars per Pound

total dollar cost in London = 57.25 * 1.5040 = $86.1040

total dollar cost in Paris = ask price in Euros / bid rate of Euros per Dollar

total dollar cost in Paris = 78.75 / 0.9110 = $86.4435

The total dollar cost is cheaper in London.

The total dollar cost in London is $86.1040

b]

total sale proceeds in London = bid price in pounds * bid rate of Dollars per Pound

total sale proceeds in London = 56.75 * 1.5000 = $85.1250

total sale proceeds in Paris = bid price in Euros / ask rate of Euros per Dollar

total sale proceeds in Paris = 78.50 / 0.9120 = $86.0746

No, there are no arbitrage opportunities because the total dollar sale proceeds are are lower than the total dollar cost in both cities

No, there are no arbitrage opportunities because the total dollar sale proceeds are are lower than the total dollar cost in both cities. That is, a risk less profit cannot be earned buying the XYZ Inc shares in one city and immediately selling the share in another city.

jeff jeffy answered 1 year ago

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