Lesson 2.1 - American Depositary Receipts

When a U.S. investor wants to purchase shares of a foreign company, there are several issues to consider. Often these corporations operate in their home currency, making it difficult for retail (individual) investors to deal with valuations and dividend payments. Also, a stock that is valued in a foreign currency is not compatible with trading in markets that use the U.S. dollar, so the investor must find a way to access a foreign stock market. American depositary receipts were created to help make investing in foreign companies much simpler for U.S. investors.

Are a type of equity security designed to simplify foreign investing for U.S. investors

American depositary receipt (ADR).

How ADRs works

• A depositary bank purchases a share in the foreing company home market

• the depositary bank will deposit the shares in a foreing branch of a us bank

• the bank will issue a receipt (ADR)

• the ADR is issue in us dollar under us laws

What does the receipt (ADR) represent?

One or more shares in the foreing company held on deposit

Advantage of ADRs

• trades on an exchange or over the counter (well regulated)

• purchased with US dollars

• dividends are converted to US dollars

• Denominated in U.S dollars

• trade and settle in the U.S

• regulated under U.S laws

Risk of ADRs

• Currency and political risk

• Voting and preemptive rights

• value rises and falls with the value of the underlying foreing stock

• Depository banks can sell any voting proxies or rights

• carries the sane risk as the underlaying security

T or F

The owner of an ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares.

True

ADRs dividends

are generated in the foreign currency but are converted into U.S. dollars by the depositary bank.

the bank is the registered owner of the shares

ADRs because they are issued by a depository bank