Characteristics of International Financial Markets Paper

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Axetem’s training program includes various training rotations in which executive trainees spend some time in various departments to receive training that is more specific and gain additional international market experience.

This week, you have been assigned to Axetem’s trading department to gain additional knowledge about various financing and investment tools in international trade. One of the characteristics of international markets is that stocks and bonds cannot simply be traded, but a convenient way to invest is through using American Depository Receipts (ADRs). Axetem’s trading department invests some of the company’s excess cash in ADRs and foreign-denominated debt securities.

As part of your training, you are presented with the following 2 assignments:

  • Describe the advantages of investing using American Depository Receipts (ADRs).
  • Help Mike Jones, one of Axetem’s investment managers, with the following calculations:

In the London market, EEC Inc.’s stock closed at £0.875 per share on Thursday, April 1, 2005. EEC trades in ADRs in the over-the-counter market in the United States. Four underlying EEC shares are packaged into one ADR. On April 10, 2005, the spot exchange rate for the British pound sterling to the U.S. dollar was £0.7366 to $1.00. Determine the no-arbitrage U.S. price of 1 ADR.

Mike Jones is also interested in a 10-year floating-rate note (FRN) with coupons referenced to a 6-month London Interbank Offered Rate (LIBOR). The note pays interest on a semiannual basis. Assume that the current 6-month LIBOR is 3%. If the risk premium above LIBOR that the issuer must pay is 1/4 percent, calculate the next period’s coupon rate on a £1,000 face-value FRN.

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