As a result of this class, you have become an experienced and avid international

Question

As a result of this class, you have become an experienced and avid international investor. On the Paris Stock Exchange, Air France-KLM stock closed at EUR11.20 per share on Friday, April 11, 2014. Air France-KLM also trades as an ADR on the NYSE. One underlying Air France-KLM share equals one Air France-KLM ADR. On April 11, 2014, the USD/EUR spot exchange rate was $1.3912/EUR1.

a. At this exchange rate, what is the no-arbitrage U.S. dollar price of one Air France-KLM ADR?
b. By comparison, Air France-KLM ADRs traded at $15.44 on April 11, 2014. Do you think an arbitrage opportunity existed? Why or why not?

Explanation / Answer

A.At this exchange the no arbitrage price of air france klm is 11.20*1.3912 = 15.5814$ at NYSE.

B.If the stock is trading at 15.44$,there is arbitrage opportunity we can buy in NYSE and sell in paris stock exchange.

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