A share of the ADR of a Dutch firm represents five share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 12 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10 and the ADR are trading at $68, what can you do to earn a trading profit, ignoring transaction costs?
Short sell 5 shares of the Dutch firm’s stock at 12 euros per share on the Dutch stock exchange, and convert the proceeds to US dollars at the spot rate of $1.10 per euro to purchase one share of ADR at the price of $68 per share in the U.S. market. The transaction would yield a profit of $2.
Short sell one share of ADR at the price of $68 in the U.S. market, and convert the proceeds to euros at the spot rate of $1.10 per euro to purchase 5 shares of the Dutch firm’s stock at 12 euros per share on the Dutch stock exchange. The transaction would yield a profit of $2.
Short sell one share of ADR at the price of $68 in the U.S. market, and convert the proceeds to euros at the spot rate of $1.10 per euro to purchase 5 shares of the Dutch firm’s stock at 12 euros per share on the Dutch stock exchange. The transaction would yield a profit of $4.
Short sell 5 shares of the Dutch firm’s stock at 12 euros per share on the Dutch stock exchange, and convert the proceeds to US dollars at the spot rate of $1.10 per euro to purchase one share of ADR at the price of $68 per share in the U.S. market. The transaction would yield a profit of $4.