Q:

In 2011, HSBC Holdings plc (HSBC) cited unfavourable market conditions when shelving plans to list on a proposed Shanghai international board, a move which never came to fruition. However, under the recent Shanghai-London stock connect, firms listed in Shanghai will be able to sell Global Depositary Receipts (GDRs) to investors in London, and those listed in London will be able to issue CDRs to investors in Shanghai. HSBC is set to be the first company to issue CDRs.

a. Conduct an arbitrage between HSBC shares listed on the HKSE and those listed on the LSE. Assume the transaction was for 100,000 shares purchased at the closing price(4.3GBP per share) on the London Stock Exchange (LSE) on 31 March 2020 and all shares were sold at the opening price (40 HKD per share ) on the Hong Kong Stock Exchange (HKSE) on 1 April 2020. Assume brokerage fee at 0.4% per trade and that it was possible to conduct the arbitrage across the two markets.

You are provided with additional information:

31 March 2020 - HKD/GBP spot rate (mid) 0.10440

1 April 2020 - HKD/GBP spot rate Bid 0.10400 and offer 0.10450

GBP borrowing rate = GBP LIBOR (overnight) + 0.3 basis point

GBP Libor(overnight)

June 01 2020 0.05363%

May 01 2020 0.05175%

April 01 2020 0.06338%

March 01 2020 0.68413%

February 03 2020 0.68263%

Jan 02 2020 0.66613%

? What is the arbitrage gain / loss