Homework Answers
solution:
a) market price of ADR = value in pounds*exchange rate
= 30*3*1.63= 146.7
so price implied by the market is 146.7
B) suppose the rate is 150 then there is arbitrage oppurtunity in the process of arbitrage price will return to equilbrium
arbitrage process is
sell ADR and convert dollar to pound and buy ADR in pound market
this will happen until price reaches 146.7 because there will be arbitrage profit untill price reaches 146.7
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