Explanation:
The value in dollars of SCU on the LSE = £29.50 × 1.5244.84. Therefore, the stock is either overpriced on the NYSE and needs to fall or is underpriced on the LSE and needs to rise. Note that arbitrage opportunities do not last long as supply and demand forces will adjust quickly to eliminate the arbitrage situation. If the price rises on the LSE from £29.50 + £0.93 = £30.43, the equivalent dollar price would be £30.43 × 1.52$/£ = $46.25` and the arbitrage opportunity would be eliminated.
(Book 3, Module 30.2, LO 30.h)
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Question 55
A stock with the ticker symbol SCU trades on both the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). The stock currently trades on the NYSE for $46.25 and on the LSE for £29.50. Given the current spot rate of 1.52 per £), if there is an arbitrage opportunity available, which of the following must happen to eliminate that opportunity?
A
There is no arbitrage opportunity available.
B
The stock price on the NYSE needs to fall by $1.33.
C
The stock price on the LSE needs to fall by £0.83.
D
The stock price on the LSE needs to rise by £0.93.
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