Page 33 - Demo

%u062c%u0645%u064a%u0639 %u0627%u0644%u062d%u0642%u0648%u0642 %u0645%u062d%u0641%u0648%u0638%u0629 %u0640 %u0627%u0625%u0644%u0639%u062a%u062f%u0627%u0621 %u0639%u0649%u0644 %u062d%u0642 %u0627%u0645%u0644%u0624%u0644%u0641 33 %u0628%u0627%u0644%u0646%u0633%u062e %u0623%u0648 %u0627%u0644%u0637%u0628%u0627%u0639%u0629 %u064a%u0639%u0631%u0636 %u0641%u0627%u0639%u0644%u0647 %u0644%u0644%u0645%u0633%u0627%u0626%u0644%u0629 %u0627%u0644%u0642%u0627%u0646%u0648%u0646%u064a%u0629Solution:1- The no-arbitrage ADR U.S. dollar price = EGP222x $0.053 = $11.77.2- The solution to number 1 shows that the no-arbitrage ADR U.S. dollar price is $11.77. If CIB ADRs were trading at $10 when the underlying share was trading in Egypt at EGP 222 ($11.77), a wise investor would buy the relatively undervalued ADRs. Since the ADRs are a derivative security, one would expect the ADRs to increase in price from $10 to$11.77.Assuming this happens, the long position could be liquidated for a profit of: The profits $11.77 - $10= $1.77 per ADR.Example2:- The next table provides the correlations among CIB Egypt, the Egyptian stock market index, and the World market index, together with the standard deviations (SD) of returns and the expected returns (R). The risk-free rate is 8%.Correlation coefficientEgypt stock market indexWorld MarketIndexSD (%)R (%)CIB (local stock) 0.80 0.25 20 -Egyptian stock market index 1.00 0.30 18 15World market index 0.30 1.00 12 12Required:1. Suppose the Egyptian stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate the equity cost of capital of CIB Egypt.2. Suppose now that CIB Egypt has made its shares tradable internationally via cross-listing on the London stock market. Again, using the CAPM paradigm, estimate the CIB equity cost of capital. Discuss the possible effects of international pricing of CIB shares on the share prices and the bank%u2019s investment decisions.Solution:Using the CAPM paradigm, the cost of equity = Risk-free return + %u03b2 (Average market return %u2013 Risk-free return)R = R + %uf062i f i(R %u2013 R )M f Cov(R R )Where: %uf062= i , MPage 34 oi f 66 Var(R )M