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Assignment 4 Problem set: Chp 13: p. 374 # 8, 9 & 10 ADR Arbitrage Tata Motors Limited is an Indian multinational automotive manufacturing company headquartered in Mumbai, India. It is simultaneously listed on Bombay Stock Exchange (BSE) and New York Stock Exchange (NYSE). It trades as an ORD on the BSE and as an ADR on the NYSE. The ordinary share (ORD) price of Tata Motors is INR 535 on BSE. The spot rate is INR66.80/USD. The depository bank charges a depository fee of 10 cents per ADR. (a) Please find the symbol of Tata Motors on NYSE, the ADR ratio, the ADR program, and the depositary bank. (b) If the price of the ADR is $41 on NYSE, is there an arbitrage opportunity? If your answer is yes, how do you design the arbitrage strategy and how much is your profit? How does the arbitrage activity affect the price of ADR and ORD in the two markets? (c) If the price of the ADR is $39 on NYSE, is there an arbitrage opportunity? If your answer is yes, how do you design the arbitrage strategy and how much is your profit? How does the arbitrage activity affect the price of ADR and ORD in the two markets? Mini-cases: Chp 14: p. 401-406 Euro Debt Financing Read the WSJ article and answer the following questions. 1. Why may U.S. companies shift from U.S. dollar bond issuance towards euro borrowing? 2. What criteria do the bonds of the U.S. companies have to meet in order to be included in the ECB's corporate purchases? 3. McDonald's Corp is investment-grade rated. It sold a total of 2 billion of bonds in April 2016, among which, the 750 million euros of 2028 notes pay a yield of 0.75%. Assume the interest is paid in euro annually. (It is easier for you to work on this problem in excel.) (1) If the euro is expected to depreciate against the dollar at 1% per annum (exchange rate is USD1.10/euro in 2016), what is the effective cost of this 2028 notes for McDonald's? (2) If the euro is expected to appreciate against the dollar at 1% per annum instead, what is the new effective cost for McDonald's? (3) Compare your answers to (1) and (2) and discuss how the exchange rate impacts the cost of euro debt for McDonald's.