5 Shares Of The London Stock example essay topic

Introduction: The Adr ADR Arbitrage Project Introduction: The primary objective of this project is get you thinking about equity investments in countries with which you are unfamiliar. Secondary objectives include learning about: American Depository Receipts (ADRs); stock exchange in various countries; exchange rates, liquidity and other institutional effects; and the effectiveness of arbitrage. As employees of a London-based merchant bank, we were assigned to conduct a preliminary investigation of the profitability of arbitrage between stocks home exchange prices and ADR prices. This preliminary investigation will conclude a recommendation on whether it is worth investing further resources in developing an arbitrage business. We have selected five stocks that met the following criteria: Home exchange is non-US Stock is also traded as an ADR on a major US stock exchange As much geographic dispersion as possible In the next session of this paper we will investigate the arbitrage opportunities in each of the five cases, at one point in time, and state our conclusions. American Depository Receipts: From a U.S. investor's point of view, an ADR is a convenient way to buy shares in some big foreign company without having to open a brokerage account over there or persuade his U.S. broker to call up the Dutch Stock Exchange, or another one.

Often, each ADR will represent more than one share of stock in the underlying company. That stock is held by a custodian, like J.P. Morgan, which makes sure that you will get your share of dividends, and other services. The five stocks we selected are: Koninklijke Philips Electronics N.V. ; Ticker: PHP; The Netherlands, Western Europe; listed on NYSE. Magyar Tavkozlesi Rt. ; Ticker: MTA; Hungary, Eastern Europe; listed on NASDAQ Sasol Ltd.

; Ticker: SASOL; South Africa, Africa; listed on NASDAQ Companhia Vale do Rio Doce; Ticker: RIO; Brazil, South America; listed on NYSE Canon Inc. ; Ticker: CANNY; Japan, Asia; listed on NYSE All markets we have studied in this project are at one point in time opened simultaneously with the US market, with the exception of the Japanese market. We assumed some kind of clearance system is active to compensate for this fact. Company Descriptions: Koninklijke Philips Electronics N.V. Philips is active in about 100 businesses, varying from consumer electronics to domestic appliances, and from security systems to semiconductors. The company is among the world's top three producers in many of these businesses, including lighting, monitors, shavers, and color picture tubes for TVs and monitors. Philips produces over 2.4 billion incandescent lamps every year, and some 30 million picture tubes; and each day, its factories turn out a total of 50 million integrated circuits.

PolyGram, a 75 per cent subsidiary of Philips, is the world's largest music corporation. Philips employs 267,200 (end March 1998) people all over the world, and had sales of US$39.2 billion in 1997. The company has production sites in over 40 countries and sales and service outlets in 150 countries. Research laboratories are located in six countries, staffed by some 3,000 scientists. A global network of some 400 designers is spread over 25 locations. Shares are listed on 16 stock exchanges in nine countries.

Philips is eighth on Fortune's list of global top 30 electronics corporations. Magyar Tavkozlesi Rt. MAT+V is the principal provider of fixed line and mobile telecommunications services in Hungary. MAT+V has exclusive rights through 2001 to provide domestic long distance and international public telephone services. MAT+V also has exclusive rights through 2001 and in some cases 2002 to provide local public telephone services in local concession areas which cover approximately 75% of Hungary's population, including Budapest and most of the major cities.

MAT+V, through its controlling interest in Westel 900 and Westel 450, is Hungary's largest mobile telecommunications service provider. Sasol Ltd. Sasol is a private sector company listed on the Johannesburg Stock Exchange and NASDAQ in the USA. It is the second largest industrial company in South Africa with a market capitalisation of more than R 33 billion and an annual turnover of more than R 15 billion. The company is active in coal mining, crude oil refining and fuel product marketing, synthetic fuel production, petrochemicals and petroleum exploration. Companhia Vale do Rio Doce (CVRD) CVRD is an integrated complex operating in both the extraction and processing of natural resources and transportation, operating individually or in association with other domestic and international companies.

It is the world's largest producer and exporter of iron ore and pellets. It is also active in prospecting, mining and benefaction of gold, manganese and other minerals, and is Brazil's largest holder of mineral rights. In addition, it has significant presence in the markets for aluminium and wood pulp. Transportation activities include operation of railroads and ports, as well as domestic and international shipping.

CVRD also has holdings in a group of companies that make steel and ferro-alloys. Finally, in 1997 it established a new company to operate in the energy sector. The company was founded on June 1, 1942. With privatization completed on May 6, 1997, CVRD began a process of change, the overall goal of which is to reorganize the company into business units and introduce a model of shared administration, under which the Board of Directors establishes the strategic direction, with the active participation of the controlling partners. Canon Inc. Canon (symbol: CANNY), headquartered in Tokyo, Japan, is a leading manufacturer of professional and consumer imaging equipment and information systems.

Canon's extensive range of products include copiers, laser beam and Bubble Jet printers, cameras, video equipment, and semiconductor-manufacturing equipment. Originally established in 1937 as Precision Optical Industry, Co., Ltd., a camera manufacturer, Canon has successfully diversified and globalized into an industry leader in professional and consumer imaging systems and solutions. The company has manufacturing and marketing subsidiaries in Japan, the Americas, Europe, Asia and Oceania, and a global R&D network with companies based in the United States, Europe, Asia and Australia. Canon has a corporate philosophy of kyo sei, or living and working together for the common good. This philosophy is the guiding force behind Canon subsidiaries around the globe and aims to raise the ideal of a society in which all people live together in happiness and fulfilment. Canon companies across the world contribute to the communities in which they are located through various methods, including the sponsoring of sporting, cultural and environmental activities.

In 1996, Canon initiated the Excellent Global Corporation Five-Year Plan, which calls for the reconfiguration of all business processes, incorporating renovations that will solidify the company's management structure. The profitability of arbitrage: ADRs never perform much differently from their underlying securities. The minute they began to diverge in any significant way, international arbitrageurs would jump in and grab the profit to be made from the difference, thereby bringing them back in line. It is possible a major discrepancy can appear, for one interesting reason: ADRs declare stock splits at times that are totally unrelated to stock splits in the underlying securities. One ADR doesn t necessarily equal one share of the underlying foreign security. Especially because London securities sell at much smaller unit prices than U.S. securities, a common ADR might equal 10 shares of the London stock.

If the London stock happens to declare a 2-1 stock split, the ADR will simply equal 20 shares of the London stock instead of 10. In the U.S., stocks rarely go over $100 per share without a split, so when an ADR goes into triple digits, the U.S. sponsor may well declare its own 2-1 stock split, and suddenly an ADR only represents 5 shares of the London stock instead of 10. This difference in value, caused by unequal stock splits, is expressed by the ratio between the ADR and the underlying stock. The results of the five stocks we selected are: Koninklijke Philips Electronics N.V. Stock quotes on August 30 thAD R Other ADR (in US$47.50 ratio: 1: 1 Underlying (in EURO 53.25 Exchange rate = 0.8928 $/ ADR in Euro 47.50/0.8928 = 53.20 Underlying in Eur 53.25 This means a difference of 0.09% (absolute value) Magyar Tavkozlesi Rt. Stock quotes on August 30th ADR Other ADR (in US$28.25 ratio: 1: 5 Underlying (in HUF 1638.00 Exchange rate = 0.003416 $/HUF 1/5 28.25 = $5.65 ADR in HUF 5.65/0.003416 = 1653.98 Underlying in HU 1638.00 This means a difference of 0.971% (absolute value) Sasol Ltd... Stock quotes on August 30th ADR Other ADR (in US$7.875 ratio: 1: 1 Underlying (in ZAR 55.20 Exchange rate = 0.143914 $/ZAR ADR in ZAR 7.875/0.143914 = 54.72 Underlying in ZA 55.20 This means a difference of 0.88% (absolute value) Companhia Vale do Rio Doce Stock quotes on August 30th ADR Other ADR (in US$28.375 ratio: 1: 1 Underlying (in BRL 51.70 Exchange rate = 0.5479 $/BRL ADR in BRL 28.375/0.5479 = 51.79 Underlying in BR 51.70 This means a difference of 0.17% (absolute value) Canon Inc. Stock quotes on August 30th ADR Other ADR (in US$46.50 ratio: 1: 1 Underlying (in JPY 4890.00 Exchange rate = 0.009423 $/JPY ADR in JPY 46.50/0.009423 = 4943.73 Underlying in JP 4890.00 This means a difference of 0.91% (absolute value) Conclusion: As shown above, the difference between the stockprice of the ADR and the stockprice in it's home country (calculated in the domestic currencies), is with all five stocks within 1%.

This means that there is very little chance to profit from arbitrage, since also transaction costs and taxes have to be paid. We have included a schedule of fees and minimal purchases of J. P Morgan, as an example of the costs that come with purchasing and selling stocks (see appendix). When you look at these fees, you can see that a certain amount per share has to be paid, next to a fixed amount per transaction (these fees differ from broker to broker, but they are more or less the same). For what about taxes, due to the fact no arbitrage is possible, taxes won t have any significance in this project.

But if it was able to create arbitrage profits, then income tax should be paid over this profits. So the possibility for creating arbitrage profit even becomes smaller. When you look at economic theory, arbitrage profit is never possible, because when markets are perfect, all information is absorbed immediately by the market, so no differences can occur. ADRs are a safe and convenient way to invest in the shares of overseas companies, and any apparent differences in performance should be explainable as (1) currency fluctuation, (2) minor effects of different closing times of exchanges, and / or (3) stock splits in both countries. Comparisons of ADRs with their securities consistently show correlations exceeding 99%. Appendix: Schedule of fees and minimum purchases of J.P. Morgan Summary Enrolment Fee – $15 (one time fee charged for account set-up) Purchase or sale of shares – $5 per transaction, plus 12 cents per share; a proportional amount for fractional share Dividend reinvestment – 5% of dividend; up to $2.50 per dividend payment Minimum Investment for first-time purchasers – $250 Enrolment fee You are required to pay an enrolment fee of $15, payable at the time of enrolment, for each company in which you are investing.

Services for Global Invest Direct account include: Withdrawal requests for certificates; Global Invest Direct termination; certificate safekeeping; tax reporting; and account transaction statements. Purchases and sales You will be charged a $5 transaction fee for each purchase or sale, plus 12 cents per full share; a proportional amount will be charged on fractional purchases or sales. We will deduct these fees from the proceeds of any such purchase or sale. Dividend reinvestment are not subject to this fee. Dividend reinvestment For individuals participating in dividend reinvestment, a fee comprising 5% of the dividend payment – up to a maximum of $2.50 – will be deducted from the dividend payment.

For initial purchasers The minimum purchase amount is $250. First-time purchasers must submit this amount, the $15 enrolment fee, and the new account enrolment form, at the time of enrolment. Existing shareholders There is no minimum purchase amount to join Global Invest Direct for existing shareholders, but additional shares can be purchased at the time of enrolment. Additional purchases The minimum amount for additional purchases is $50. Total annual purchases cannot exceed the maximum annual amount of $100,000 per Global Invest Direct account.