Chapter 5
Equity: Markets and Instruments
1. The central electronic limit order book is the hub of those automated markets that are order-driven
(not price-driven.) Statement III, therefore, is not correct.
2. a. The market order will be executed against the best matching order(s). Accordingly, Vincent
3. On the Paris Bourse, the investor who placed the limit order at €24 stands to lose. Informed market
participants can sell the share to this investor at €24, although the share is truly worth only €21.
4. Small orders are generally market orders (buy or sell at the best price available in the market). In an
order-driven system without developed market making, the automated limit order book generally
shows a huge spread between the lowest ask and the highest bid of the orders currently in the system.
When a new market order reaches the system, it is unlikely that a matching opposing market order
5. Each of the three statements about ECNs is true.
6. a. There are not enough buy orders to meet the minimum fill requirement of Participant C, and his
order would not be fulfilled. Participant A would buy 50,000 shares at €37 each, and Participant B
would sell 50,000 shares at €37 each. Half of Participant A’s order would remain unfulfilled.
Because the prevailing price is €37, Participant D’s order to buy at €36 would remain unfulfilled.
Chapter 5 Equity: Markets and Instruments 25
b. Taking into account the trading activity in the first crossing session and the new orders submitted
to the next session, the following orders would be there for the next session:
Participant A: a market order to buy 50,000 shares
7. Unlike U.S. banks, it is common for European banks to own shares of their client banks.
Accordingly, the answer is (b).
9. The apparent market capitalization of these four companies taken together is 50 million 4 =
200 million. But because of their cross-holdings, there is some double counting. The usual free-float
adjustment would be to retain only the portion that is not owned by other companies within the group.
a. The adjusted market capitalization is as follows:
10. a. Net dividend in euros, after deducting withholding tax = €0.50 per share 1,000 shares
b. The investor bought the shares for €56.91 per share 1,000 shares = €56,910, or €56,910
26 Solnik/McLeavey • Global Investments, Sixth Edition
c. The investor would need to declare the total dividends, that is, without deducting the withholding
11. a. Initial investment = 41 100 = $4,100
Gross dividend = 2 100 = $200
Selling value = 51 100 = $5,100
Gross return in dollars = (5,100 + 200 − 4,100)/4,100 = 0.2927, or 29.27%
12. The correct answer is (c): Investors in nondomestic common stock normally avoid double taxation on
dividend income by receiving a tax credit for taxes paid to the country where the investment is made.
13. Cost in U.S. dollars per share = $24.37 4 = $97.48 (because one Lafarge ADR is equivalent to one-
fourth of a Lafarge share). Therefore,
14. The German firm is considering a Level III ADR program. Accordingly, it must satisfy the requirements
of both the NYSE and the U.S. Securities and Exchange Commission (SEC). This could impose
substantial dual-listing costs on the German firm. The SEC will require the German firm to file a
Chapter 5 Equity: Markets and Instruments 27
15. The cost in British pounds, including commission and transaction tax, would be £3.60/share
17. Each of the three statements is true.
18. The creation of WEBS for a country creates an additional option for an investor seeking to invest in
equities in that country. Having an additional method by which to participate in a foreign market is
19. The announcement of foreign investment restrictions increases the importance of closed-end country
20. The cost of 20,000 shares in the United States is $43.65 per share 20,000 shares = $873,000.
The cost in Germany in euros, including a 0.10% commission, would be €44.95 20,000 shares
1.0010 = €899,899. So, the cost in dollars is €899,899 $ 0.9710 per € = $873,801.93. Thus, it is
better to buy the shares traded on the NYSE, saving 873,801.93 − 873,000.00 = $801.93.
21. During the six-hour time period when London is trading but the United States is not, the NAV of
the fund in British pounds would be fluctuating in accordance with how the prices of the stocks in the
index are changing. Because the U.S. market is closed, the most recent reported dollar price of the
fund in the United States would not have changed. Then the U.S. market opens, and the fund’s shares