This assignment comprises two questions, designed to test students' awareness on topics

involving speculative and hedging strategies. In Question 1, students are expected to conduct a

trading transaction on a company's shares which are listed on two stock exchanges.

system). .

question: 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.

RequirementConduct 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 on the London Stock Exchange (LSE) on 31 March 2020 and all shares were sold at the opening price 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 points

GBP LIBOR (Overnight)

GBP LIBOR (Overnight)

June 01 2020 0.05363 %

May 01 2020 0.05175 %

April 01 2020 0.06338 %

March 02 2020 0.68413 %

February 03 2020 0.68263 %

January 02 2020 0.66613 %

-What is the arbitrage gain / loss and at what range of spot exchange rates would make the trade profitable / non-profitable?

-Comment on the profit or loss in part a above.