Question

You are a U.S. investor and wish to buy 10,000 shares of Baguette Inc. You can buy them on the Paris Stock Exchange or on London Stock Exchange. 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 (in pounds) 56 3/4 - 57 1/4

Paris (in euros) 78 1/2 - 78 3/4

dollars per pound 1.5000 - 1.5040

euros per dollar 0.91100 - 0.91200

What is your total dollar cost if you buy the Baguette shares at the cheaper place?
Are there arbitrage opportunities between London and Paris? Explain.

Answer 1

		USA	Paris	London
		Dollars	Euros	Pounds
Stock	Buy		78.75	57.25
	Sell		78.5	56.75
Dollars per pound	Buy			1.504
	Sell			1.5
Euros per Dollar	Buy		0.912
	Sell		0.911
If bought in pounds, Pound required = 10,000 * 57.25
572500
Pound	$
1	1.504
572500	8,61,040
If bought in Euros, Eurosrequired = 10,000 * 78.75
787500
Euros	$
0.912	1
787500	8,63,487
Thus, Pound option is cheaper.
Dollar Cost = 8,61,040 $

There are arbitrage Opportunities since costs under both the options are not same.