Question

You are a U.S. investor and wish to buy 10,000 shares of XYZ Inc. You can

buy them on the Paris Stock XC or on London Stock XC. You ask the brokers

to quote you net prices (no commissions paid). There are no taxes on foreign shares listed

in London. Here are the quotes:

London (Pound) 56.75 - 57.25

Paris (Euro) 78.5 - 78.75

(Dollars per Pound) 1.5000 - 1.5040

(Euro per dollar) 0.91100 - 0.91200

a. What is your total dollar cost if you buy the XYZ Inc shares at the cheaper

place?

b. Are there arbitrage opportunities between London and Paris? Explain.

Please solve in Excel

Answer 1

We will calculate to Total Dollar cost in both the places

A. London (Pound)

To buy 10000 shares of XYZ we need 10000 * 57.25 = 572500 pounds

To Buy 572500 pounds we need 572500 * 1.5040 = 861,040 dollars

B. Paris (Euro)

To buy 10000 shares of XYZ we need 10000 * 78.75 = 787500 Euro

To buy 787500 Euro we need 787500 / 0.91100 = 864,434.68 dollars

We will buy XYZ from London Stock XC because it is cheaper

Yes there is arbitraj opportunity

We can sell share short in paris and buy share in london to make arbitraj profit.