Question 1 (20 marks) Volkswagen AG notified JPMorgan Chase Bank, N.A., as Depositary, that effective 13 August 2018, it is terminating each of its sponsored American Depositary Receipt ('ADR') programmes. However, though the sponsored ADR programme (ticker VLAKY) was terminated, an unsponsored American Deposit ('AD') is trading on the United States OTC markets under the ticker WWAGY. So, holders of VLKAY have until 13 August 2018 to either exchange the ADRs for the unsponsored ADs (ticker WWAGY) or exchange the ADRs for 5 ordinary shares of Volkswagen listed on the German stock exchanges. Accordingly, the ratio of unsponsored Ads to the ordinary share is 10:1. This means that each WWAGY represents one-tenth of one ordinary common share of Volkswagen. b. Conduct an arbitrage between Volkswagen ordinary shares listed on the Frankfurt Stock Exchange and the unsponsored ADs (ticker WWAGY). Assume you are able to package the purchased 10,000 shares into the unsponsored ADs. You purchased the shares on 26 March 2019 and sold the ADs on 16 April 2019, both trades done at the respective closing prices. Outline the process of the arbitrage to derive the arbitrage gain or loss. At what range of the share price would make the arbitrage profitable? You are provided with the following information: 26 March 2019 16 April 2019 USD/EUR spot rate: 0.7960 - 0.8810 0.8700 - 0.8760 Euro borrowing rate (per annum) (Based on 1-week Eur LIBOR) -0.446% + 20 basis pts -0.490% + 20 bp X euros Y euros Volkswagen share price ADs (ticker VWAGY) price A US dollars BUS dollars Question 1 (20 marks) Volkswagen AG notified JPMorgan Chase Bank, N.A., as Depositary, that effective 13 August 2018, it is terminating each of its sponsored American Depositary Receipt ('ADR') programmes. However, though the sponsored ADR programme (ticker VLAKY) was terminated, an unsponsored American Deposit ('AD') is trading on the United States OTC markets under the ticker WWAGY. So, holders of VLKAY have until 13 August 2018 to either exchange the ADRs for the unsponsored ADs (ticker WWAGY) or exchange the ADRs for 5 ordinary shares of Volkswagen listed on the German stock exchanges. Accordingly, the ratio of unsponsored Ads to the ordinary share is 10:1. This means that each WWAGY represents one-tenth of one ordinary common share of Volkswagen. b. Conduct an arbitrage between Volkswagen ordinary shares listed on the Frankfurt Stock Exchange and the unsponsored ADs (ticker WWAGY). Assume you are able to package the purchased 10,000 shares into the unsponsored ADs. You purchased the shares on 26 March 2019 and sold the ADs on 16 April 2019, both trades done at the respective closing prices. Outline the process of the arbitrage to derive the arbitrage gain or loss. At what range of the share price would make the arbitrage profitable? You are provided with the following information: 26 March 2019 16 April 2019 USD/EUR spot rate: 0.7960 - 0.8810 0.8700 - 0.8760 Euro borrowing rate (per annum) (Based on 1-week Eur LIBOR) -0.446% + 20 basis pts -0.490% + 20 bp X euros Y euros Volkswagen share price ADs (ticker VWAGY) price A US dollars BUS dollars
