In the London Market, Rolls Royce Stock Closed at £0

question 27

Multiple Choice

In the London market, Rolls Royce stock closed at £0.875 per share on Thursday, April 17, 2003. Rolls Royce trades as an ADR in the OTC in the United States. Five underlying Rolls Royce shares are packaged into one ADR. On April, 17, 2003, the British Pound sterling to the U.S. spot exchange rate was £0.6366/$1.00.
-Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share) are trading for $40 on the New York Stock exchange.The current exchange rate is SF1/$ and a trader has $10,000 or the equivalent in SF.How can the trader make an arbitrage profit?

• A) Buy ADRs in Zurich and sell shares in New York.
• B) Buy ADRs in New York and sell shares in Zurich.
• C) Buy shares in Zurich and sell ADRs in New York.
• D) Buy shares in New York and sell ADRs in Zurich.

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