SIE Ready🧾 Equity Securities · Lesson 4 of 5 · 5 min
ADRs: Foreign Stock in U.S. Dollars
🌍 You can own a slice of a company based in Tokyo or Paris without touching yen or euros. The currency risk, though, comes along for the ride.
💡 Key idea
ADRs trade and pay in dollars but still carry currency risk. Only Level 1 ADRs may be unsponsored, and they trade only OTC.
🧠 Why it matters
An AMERICAN DEPOSITARY RECEIPT (ADR) represents shares of a non-U.S. company held by a U.S. DEPOSITARY BANK. ADRs trade in U.S. dollars on U.S. exchanges or over the counter, and the bank passes dividends on in dollars, usually after deducting a custody fee. SPONSORED ADRs exist under an agreement between the foreign company and the bank. UNSPONSORED ADRs are set up without the company's involvement, and only Level 1 programs (OTC only, no capital raising) may be unsponsored. Level 2 lists on an exchange; Level 3 can also raise capital. Key risk: CURRENCY. The underlying shares are priced in a foreign currency, so a stronger dollar lowers the ADR's dollar value.
📈 In the real world
💱 Tomás buys ADRs of a German automaker. The company's shares are flat in euros all year, but the dollar strengthens against the euro. When his statement arrives, his ADRs are worth less in dollars. Nothing went wrong with the company; that loss is pure currency risk.
📌 Takeaways
- An ADR is a receipt for foreign shares held by a U.S. depositary bank
- Sponsored = company agreement; only Level 1 (OTC, no capital raising) may be unsponsored
- Dollar-denominated, yet exposed to exchange-rate (currency) risk
📖 Terms in this lesson
American depositary receipt (ADR): A US-traded receipt for shares of a foreign company held by a depositary bank; holders still carry currency risk.
✅ Test yourself
Which entity creates and issues ADRs to U.S. investors?
- A U.S. depositary bank
- The SEC's Division of Trading
- The foreign company's home regulator
- The Federal Reserve Bank of New York
Answer: A · A U.S. depositary bank
A U.S. depositary bank creates ADRs once the foreign shares are deposited with it or its custodian. Regulators and the Fed do not issue ADRs.
An ADR holder is most directly exposed to which risk that a holder of a U.S. company's stock generally is not?
- Interest rate risk
- Business risk
- Currency exchange-rate risk
- Market risk
Answer: C · Currency exchange-rate risk
The underlying shares are valued in a foreign currency, so exchange-rate moves change the ADR's dollar value. Business, market and interest rate risk affect U.S. stocks too.
Which statement about unsponsored ADRs is accurate?
- They can be used to raise new capital
- They may exist only as Level 1 programs
- They must be listed on a national exchange
- They require the foreign issuer's agreement
Answer: B · They may exist only as Level 1 programs
Per the SEC, only Level 1 programs may be unsponsored, and Level 1 trades only OTC and cannot raise capital. By definition an unsponsored ADR is set up without the issuer's agreement.
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