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1. On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥2,907 per share on Monday, June 6, 2016. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On June 6, 2016, the ¥/$ exchange rate was ¥107.57/$1.00.
At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?
By comparison, Honda ADRs traded at $27.18. Do you think an arbitrage opportunity exists?
2. If Honda ADRs were trading at $31 when the underlying shares were trading in Tokyo at ¥2,907, what could you do to earn a trading profit? Use the information in problem 1 to help you, and assume that transaction costs are negligible.
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