American Depositary Receipts (ADRs)
Chapters in this video
- 0:00 Ivy's problem: investing in foreign stock with United States dollars only
- 1:34 The three-step ADR creation process: foreign shares, vault, certificates
- 2:42 Currency risk trap: same foreign price, weaker euro, lower dollar value
- 4:24 Political risk, foreign tax withholding, and the double taxation myth
- 5:05 Equity versus debt distractors: Eurodollar bonds, Yankee bonds, currency ETNs
- 6:07 Sponsored versus unsponsored ADR programs
- 7:17 Level 1, Level 2, and Level 3 sponsored ADR requirements
- 8:30 Rapid-fire exam recap
What this video covers
- How a United States depositary bank creates ADRs by purchasing foreign shares, vaulting them, and issuing dollar-denominated certificates that trade on United States exchanges
- Why ADRs still carry currency (exchange rate) risk even though they trade in United States dollars, with the exact math showing how an unchanged foreign share price drops in dollar terms when the foreign currency weakens
- The difference between foreign tax withholding and double taxation, and how investors claim a foreign tax credit on their United States return
- Why Eurodollar bonds, Yankee bonds, and currency exchange-traded notes (ETNs) are debt or currency instruments, not equity exposure to a foreign company like an ADR
- Sponsored versus unsponsored ADRs: where each trades, which offers more investor protection, and why only sponsored programs may list on major exchanges
- The three levels of sponsored ADRs and the critical distinction that only Level 3 ADRs can raise new capital through a public offering
- Unsponsored ADR limitations: over-the-counter (OTC) trading only, minimal Securities and Exchange Commission (SEC) reporting, and lack of foreign company involvement
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