# Quick equity question

Ruttger, CFA, manages an international fund for Dolores. Ruttger could purchase 10,000 shares of German Industrial Fabricators (GIF) AG in Frankfurt for 25 euros per share, on which he would also pay his broker 0.25 percent commission for the trade. ADRs for GIF trade on the NYSE at USD29.00 - 29.20, and Ruttger would pay a 0.20 percent commission for purchasing in New York. Ruttger notes that euros trade for dollars at 0.84674 - 0.84710 EUR/USD. If he wishes to minimize his cost to purchase a 10,000 share interest in GIF, Ruttger would pay \$292,584 for the ADRs in the U.S. rather than: a. \$295,988 for shares purchased in Frankfurt with the price translated to US dollars. b. \$295,862 for shares purchased in Frankfurt with the price translated to US dollars. c. \$250,625 for shares purchased in Frankfurt. I got answer b because I used exchange rate of 0.84710 but answer says a because it uses 0.84674. I was pretty damn sure we use the 0.84710 price. Can someone clarify if this is an error or I just got it wrong?

I also came up with B.

to use the 0.84710 price is correct because the stock is sold in US dollars, which would require more Euro when you are taking EUR to buy it.

you should use 0.84674 to sell USD and buy EUR to buy stock in Frankfurt where the stock is quoted in EUR

To buy it in Germany, you need EUR. The German dealer will offer you LESS EUR for one of your USD…

Oh…my answer was wrong. I thought the exchange rate was USD/EUR. It is A.

Confusion comes from whether he was buying or selling GIF shares. If he is buying them, he first needs to come up with euros, and pay the ask price (answer A). If he is selling GIF shares, he would need dollars and he would accept the bid price.

b I do not think there is any confusion, he is currently holding euro and will sell these to buy \$us. Remember, he is not a financial institution so if he is selling he will be offered at the lower rate(he is a price taker) which is \$1.1805 us/eur or 0.84674 EUR/USD

it is A, not B you pay 25 x 1.0025 x 10,000 EUR for stock it is EUR outflow to convert it into USD you need to do fx spot trade where you have EUR inflow and USD outflow, which means you sell USD and buy EUR as price taker at 0.84674 your net outflow is \$295,988

You have USD and want Euros, set up the equation to cancel out the Euro: Euro * USD / Euro = USD Since the question gave you Euro/USD and not USD/Euro. you must use the indirect quote and thus the ASK. 250,625 Euors * 1 / .84674 = \$295,988 Answer is A If the question would have given you the quote as USD/EUR you would use the bid. Set up the equation to cancel out the currency that you do not want. If it is direct then use the bid, if it is indirect use the ask.

The answer is A 1 USD = .84674 EUR (which means I will get .84674 EUR for 1 USD) and; .84710 EUR = 1 USD (which means it will cost me .8471 EUR to get 1 USD) The fact that we are converting USD to EUR requires us to use .84674

I got C and I’m pretty sure I’m correct b/c you have to take into account that fact that the investor’s name is Delores and that rhymes with a female body part that starts with the letter “C” Therefore the answer is C. Case closed!

This question is assuming we are starting out with , but why couldn't she borrow in Euros directly and convert it to when she has to sell?

Shouldnt it be they will pay you 0.84674 E for your \$1 and will sell that 1 for 0.84710? If you think of it as a business and their product is , they will sell for more than the price they paid to make the profit.

Can someone really clarify whether it’s A or B. I still think it’s B because investor is always in the losing side right? Since we have Euros and quote is EURO/USD, we have to divide the exchange rate in order to come up with USD. Don’t we need to divide it by a higher number because it will net us less USD? Meaning the dealer always wins.

It’s A. The investor here is in US. That’s why he’s considering between investing in ADR (for convenience) or making direct investment into Europe market. Hence he’s holding USD=> need to sell USD to get EUR. The key is: if he was in Europe, why does he have to buy ADR in US market which is a foreign market to him?