Question

You are a Russian investor. You see that Aeroflot is traded on both the Russian and the U.S. exchanges at the following rates: Bid 40.00 95 Ask 42.00 Aeroflot-US dollars (USD) Aeroflot-Russian rubles (RUR) 100 Currency rates are as follows: USD 0.495 RUR 2 per RUR per USD USD 0.50 RUR 2.02 Since you are a Russian investor, you are only interested in whether an arbitrage opportunity exists by buying the stock in Russia and selling it in the United States. Does an arbitrage opportunity exist for you? How much would you gain or lose by buying the stock in Russia and selling it in the United States? Show your work for full credit. (4 points).

Answer 1

There is no opportunity for the Russian investor as the stock conversion rate comes out to be => Aeroflot RUR (Ask)/Aeroflot USD (Bid) => 100/40 = 2.5, which is greater than Bid rate for RUR/USD.

Hence the Russian investor would be at a loss if he buys from the Russian market and sells at the US market.

Calculation of Loss would be as follows;

Buy 1 stock from the Russian market @ 100 RUR

Sold the same stock in the US market @ 40 USD

Conversion of sale proceeds in RUR (@ 2 per USD) = 80 RUR

Hence the net loss = 20 RUR per share.