Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR

Question

Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $290 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for €29 per share and that the current dollar/euro exchange rate is $1.25/€. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $72.5 per share (or per ADR).

a) Assume that REC's stock price rises from €29 to €37 per share. If the exchange rate does not also change, what will happen to REC's ADR price?

b) If the euro appreciates from $1.25/€ to $1.27/€ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price?

Please show how you arrived at the answer

Explanation / Answer

a) ADR price = 37*1.25*2 = $92.5

b) ADR Price = 29*1.27*2 = $73.66

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects