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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

A GDR represents 4 equity shares of an Indian company. The share trades at ₹500 on the NSE and the exchange rate is ₹80 per US dollar. If the GDR trades at US$ 27.50 abroad, what is the position relative to the parity value?

The GDR trades at a premium of US$ 2.50 over parity. Four shares at ₹500 equal ₹2,000, which at ₹80 per dollar is US$ 25. Since the GDR trades at US$ 27.50, it is above the underlying share value by US$ 2.50.

  1. AGDR trades at a premium of US$ 2.50 over parity value of US$ 25Correct
  2. BGDR trades at a discount of US$ 2.50 to parity value of US$ 30
  3. CGDR trades at a premium of US$ 2.50 over parity value of US$ 30
  4. DGDR trades at parity value of US$ 27.50

Explanation

Parity value = 4 x ₹500 = ₹2,000; at ₹80 per dollar this is US$ 25. The GDR price of US$ 27.50 exceeds this by US$ 2.50, a premium. Working back: 25 x 80 = 2,000 = 4 x 500. US$ 30 results from using 4.8 shares or a wrong rate.

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