Today, the stock price of VALE S.A. (based in Brazil) is priced at BRL 13 per sh

Question

Today, the stock price of VALE S.A. (based in Brazil) is priced at BRL 13 per share. The spot rate of the Brazilian Real (BRL) is $.25. During the next year, you expect that the stock price of Vale to Increase by 10%. You also expect that the BRL will depreciate against the U.S. dollar by 8% during the next year. You own American depository receipts (ADRs) that represent Vale stock. Each share that you own represents one share of the stock traded on the Bovespa. What is the estimated value of the ADR per share in one year? Explicitly state any assumptions you have made to compute this problem.

Explanation / Answer

In next year,

Stock price of VALE = BRL (13 x 1.10) = BRL 14.3

Exchange rate = $0.25 x 0.92 (Since BRL will depreciate 8% against $) = $0.23

So, Stock price of VALE in $ = BRL 14.3 x $0.23 = $3.29

Since I own ADRs for VALE stock in 1:1 ratio, value of 1 ADR next year = $3.29

The assumption here is my holding of ADR will remain unchanged in the portfolio and I will hold ADRs in 1:1 proportion of VALE stock as it is now.

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