Arbitrage of ADRs On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 per share on Thursday, April 11, 2013. Honda trades as and ADR on the NYSE. One underlying Honda share equals one ADR. On April 11, 2013, the ¥/$ spot exchange rate was ¥99.8270/$1.00.
a) At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?
b) By comparison, Honda ADRs traded at $39.97. Do you think an arbitrage opportunity exists?
c) If Honda ADRs were trading at $44 when the underlying shares were trading in Tokyo at ¥3,945, what could you do to earn a trading profit? Use the information in a) and b), above, to help you and assume that transaction costs are negligible.