Download American Depositary Receipts And The U.S. Dollar

Amercian Depositary Receipts And The U.S. Dollar
An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depositary bank,
such as the Bank of New York, and represents a specific number or fraction of shares in the non-U.S.
company. The shares of the non-U.S. corporation
trade on a non-U.S. exchange and typically trade in
the currency of the country in which they are traded.
The purpose of ADRs is to make it easier for North
Americans to invest in foreign companies. ADRs are
quoted in U.S. dollars and trade just like any other
U.S. stock. Any dividends received are converted to
U.S. dollars.
It is important to note that even though ADRs are
denominated in U.S. dollars, the investor in an ADR
has no exposure to changes in the value of the U.S.
dollar. This is because the U.S. dollar price of an
ADR is directly related to the price of the stock in its
home market. If the U.S. dollar depreciates against
the foreign currency, the price of the ADR rises to
reflect this.
In actuality the holding of American Depositary Receipts does not increase your clients exposure to the
US dollar, ADRs will act as a hedge against the general decline of US dollar. So the currency exposure
that you have is related to the currency of the shares
in the local market not the US dollar.
American Depositary Receipts are quoted in US dollars, but the value of an ADR is based upon the underlying security in the local market. As such the
price of an ADR in US dollars is dependent upon its
value in the local market. Assume you own Sony
Corp as an ADR. Sony Corp on the Tokyo Stock Exchange currently trades for Yen 5400 and the current exchange rate is 0.008873USD/YEN. The Sony
Corp. ADR is currently priced at USD $47.91 on the
New York Stock exchange, which is essentially the
Yen Price, converted at the current exchange rate
(Yen 5400 * 0.008873USD/YEN).
So if the US dollar deprecates against the Yen, and
assuming the local price does not change, the
quoted US dollar price will automatically rise to offset the currency deprecation. For example, assume
the US dollar deprecates by 10% to 0.009760 USD/
YEN. The new stock price becomes USD $52.71 (Yen
5400 * 0.009760 USD/YEN) which is a 10% appreciation to the stock price in USD terms. Therefore,
the price of American Depositary receipts in USD
terms will rise to offset the depreciation of the USD,
or fall to offset an appreciation of the USD.
Additionally there will not be an adverse impact to
the Canadian dollar price or return assuming that
the depreciation of the USD to Yen is the same as
depreciation of USD to Canadian dollar. For example assume the initial exchange rate is 1.07 USD/
CAD which result in a CAD $44.78 price for the Sony
Corp ADR. If the USD depreciates by 10% to 1.177
USD/CAD the price or return in Canadian dollars is
unchanged.
The only time there is an adverse impact to the Canadian dollar return is in the case of the USD dollar
depreciating more relative to the Canadian dollar
than the Yen (or the underlying currency of the
ADR). This would imply that the Canadian dollar is
appreciating relative to the Yen or the other foreign
currency. In this case the return in Canadian dollars
would be reduced. Conversely if the Canadian Dollar depreciates relative to the Yen or any other foreign currency then the performance of the account
would be enhanced.
Amercian Depositary Receipts And The U.S. Dollar
Before USD currency deprication
After US currency depreciation
Example of Currency Impact on Sony Corp ADR
Yen/USD
USD/Yen
Yen Price on Tokyo
Exchange Rate
Exchange Rate
Stock Exchange
112.7
0.008873
5400
123.97
0.009760
5400
Percentage Change USD relative to Yen
Before USD currency depreciation
After US Currency depreciation
-10.0%
CAD/USD
Exchange Rate
0.935
0.850
USD/CAD
USD Dollar price of
Exchange Rate
ADR on NYSE
1.070 $
47.91
1.177 $
52.71
Percentage Chang USD Relative to CAD
-10.0%
Page 2
US Dollar Price of
ADR on NYSE
$
47.91
$
52.71
10.0%
CAD Dollar
Equivalent Price
$
44.78
$
44.78
0.0%
BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée (collectively “BMO Nesbitt Burns”) provide this publication to clients for informational purposes only.
BMO Nesbitt Burns makes every effort to ensure that the contents herein have been compiled or derived from sources believed reliable and contain information and opinions
which are accurate. However, BMO Nesbitt Burns does not make any representation or warranty, express or implied, in respect thereof, take any responsibility for any errors
and omissions that may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be
available to BMO Nesbitt Burns that is not reflected herein. The comments included in this publication are not intended to be legal advice or a definitive analysis of tax
applicability. Such comments are general in nature and professional advice regarding an individual's particular position should be obtained. For investment advice regarding
your specific situation, please speak to a BMO Nesbitt Burns Investment Advisor.
BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée are indirect subsidiaries of Bank of Montreal.
“BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation
Limited, used under licence.
11/07