FINC495 Week 6 Assignment 6

Instructions

Complete the following questions and submit your answers to the Dropbox by midnight Sunday:

• Chapter 13, Pg 345 Questions 2 & 4-6
• Chapter 13, Pg 345 Problems 1 & 2
• Chapter 14, Pg 362 Questions 1-4

 

Chapter 13

Question 2

As an investor, what factors would you consider before investing in the emerging stock market of a developing country?

 

 

Question 4

Discuss any benefits you can think of for a company to (a) cross-list its equity shares on more than one national exchange, and (b) to source new equity capital from foreign investors as well as domestic investors.

 

 

Question 5

Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts rather than the actual shares of the company?

 

 

Question 6

Why do you think the empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, that industrial membership of a firm was of little importance in forecasting the international correlation structure of a set of international stocks?

 

Problem 1

On the Tokyo Stock Exchange, Honda Motor Company stock closed at ¥3,945 per share on Thursday, April 11, 2013. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On April 11, 2013, the ¥/$ exchange rate was ¥99.8270/$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 $39.97. Do you think an arbitrage opportunity exists?

Problem 2

If Honda ADRs were trading at $44 when the underlying shares were trading in Tokyo at ¥3,945, what could you do to earn a trading profit? Use the information in problem 1 to help you, and assume that transaction costs are negligible.

 

 

Chapter 14

Question 1

Describe the difference between a swap broker and a swap dealer.

 

 

Question 2

What is the necessary condition for a fixed -for-floating interest rate swap to be possible?

 

 

Question 3

Discuss the basic motivations for a counterparty to enter into a currency swap.

 

 

Question 4

How does the theory of comparative advantage relate to the currency swap market?