PLEASE SHOW WORK ANSWER THIS ONE

If Honda ADRs were trading at $34 when the underlying shares were trading in Tokyo at 2,717, what could you do to earn a trading profit? Use the information in problem 1, above, to help you and assume that transaction costs are negligible.

PLEASE SHOW WORK

QUESTION 1

On the Tokyo Stock Exchange, Honda Motor Company stock closed at 2,717 per share on Thursday, July 29, 2010. Honda trades as and ADR on the NYSE. One underlying Honda share equals one ADR. On July, 29, 2010, the /$ spot exchange rate was 86.7750/$1.00.

a. At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?

b. By comparison, Honda ADRs traded at $30.96. Do you think an arbitrage opportunity exists?