In: Finance
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
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.