ADR Arbitrage China Telecom Corp. is simultaneously listed on Hong Kong Stock Ex

Question

ADR Arbitrage

China Telecom Corp. is simultaneously listed on Hong Kong Stock Exchange (HKSE) and New York Stock Exchange (NYSE). It trades as an ORD on the HKSE and as an ADR on the NYSE. The ordinary share (ORD) price of China Telecom is HKD 4 on HKSE. The spot rate is HKD7.75/USD. The depository bank charges a depository fee of 10 cents per ADR.

Question: If the price of the ADR is $52 on NYSE, is there an arbitrage opportunity? If your answer is yes, how do you design the arbitrage strategy and how much is your profit?

Explanation / Answer

Borrow and Sell ADR on NYSE @ $52

Receive 52 pay depository fee of 10 cents, final receipt = 51.9

Amount received in hkd = 51.9*7.75 =

402.225

Buy on HKSE @ 4 HKD

Total profit = 402.225-4 = 398.225 HKD

402.225

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