EECS 1710 Lecture Notes - Lecture 34: French Market, Arbitrage

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blushweasel304

24 Jun 2018

School

York University

Department

Electrical Engineering and Computer Science

Course

EECS 1710

Professor

Melanie Baljko

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EECS 1710 Lecture 34 Notes

Introduction

Non-U.S. Firms Listing on U.S. Exchanges

 Continuing with the previous example, assume that there are no transaction costs.

 If PADR < (PFS S) then ADR shares will flow back to France

 They will be converted to shares of the French stock and then traded in the French

market.

 Investors can engage in arbitrage by buying the ADR shares in the United States,

converting them to shares of the French stock

 Then selling those shares on the French stock exchange where the stock is listed.

 The arbitrage will (1) reduce the supply of ADRs traded in the U.S. market, putting

upward pressure on the ADR price, and (2) increase the supply of the French shares

traded in the French market, putting downward pressure on the stock price in France.

 The arbitrage will continue until the discrepancy in prices disappears.

 The preceding example assumed a conversion rate of one ADR share per share of stock.

 Some ADRs are convertible into more than one share of the corresponding stock.

 Under these conditions, arbitrage will occur only if: PADR ¼

 Conv PFS S where Conv denotes the number of shares of foreign stock that can be

obtained for the ADR.

 EXAMPLE

 If the Pari ADR described previously is convertible into two shares of stock, the ADR

price should be: PADR ¼ 2 20 $1:05 ¼ $42

 In this case, the ADR shares will be converted into shares of stock only if the ADR price is

less than $42.

 In reality, there is some transaction costs associated with converting ADRs to foreign

shares.

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Document Summary

Continuing with the previous example, assume that there are no transaction costs. If padr < (pfs s) then adr shares will flow back to france. They will be converted to shares of the french stock and then traded in the french market. In this case, the adr shares will be converted into shares of stock only if the adr price is less than . In reality, there is some transaction costs associated with converting adrs to foreign shares. This means that arbitrage will occur only if the potential arbitrage profit exceeds the transaction costs. One can find adr price quotations on various websites, such as www. adr. com. Many of the sites that provide stock prices for adrs are segmented by country. Converted to shares of the french stock and then traded in the french market. Investors can engage in arbitrage by buying the adr shares in the united states, converting them to shares of the french stock.

EECS 1710 Lecture Notes - Lecture 34: French Market, Arbitrage

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