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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