Question

5. You notice that the share price of Gazprom (a Russian natural gas company) is selling...

5. You notice that the share price of Gazprom (a Russian natural gas company) is selling for the Russian currency equivalent of $11 a share in the Russian market and the ADR for Gazprom is selling for $12 in the US market. How do you make a profit? This is just another form of arbitrage (buy low, sell high, make a profit). Be specific r.e. the stages involved in the trade.
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Answer #1

Price of the ADR= $12
Price in the Russian share market (in US equivalent terms) = $11.

Hence, one should buy at a cheaper price in Russian share market, convert it to USD, this will incur him the cost of $11 (+ some additionally transaction / conversion charges or taxes etc).

He can now sell these shares in the US at $12 to earn his profits. As he sells his shares here, the prices of ADR's will reduce in US. Hence, please note that the volume of the ADR's in the US market should also be large enough to allow him to carry out the transaction without affecting the $12 price in the market. Otherwise, he may make lesser profits/ even losses.

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