Axetem’s Training, business and finance homework help

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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.

Please list all calculations in detail.

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