American Depository Receipts

Course: Investment Planning
Lesson 4: International Equity Securities

Student Question:

Hi,

On the CFP board practice question (below), the correct answer was “4 only.”  How come ADRs don’t eliminate currency risk? Aren’t they purchased and sold with US dollars?

American depository receipts (ADRs) are used to

1. Finance foreign exports
2. Eliminate currency risk
3. Sell U.S. securities in overseas markets
4. Trade foreign securities in U.S. markets

---

Instructor Response:

Hi

Great question.  I can see exactly why you would question that.  But even though ADRs trade in US dollars, their prices and dividends are economically linked to the foreign currency.  That means that if the foreign currency weakens relative to the dollar, the ADRs value will decline in dollar terms.

Let me know any other questions here!