Q1. On the Milan bourse, Fiat stock closed at EUR31.90 per share on Friday, September 10, 1999. Fiat trades as and ADR on the NYSE. One underlying Fiat share equals one ADR. On September 10, the $/EUR spot exchange rate was $1.0367/EUR1.00. At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?
Q2. If Fiat ADRs were trading at $35 when the underlying shares were trading in Milan at EUR31.90, what could you do to earn a trading profit? Use the information in problem 1, above, to help you and assume that transaction costs are negligible.