Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A foreign issuer wants to raise capital in the U.S. markets by issuing shares that can be traded on U.S. stock exchanges. Which of the following instruments would they MOST likely use?
- AForeign Currency Options.
- BGlobal Depositary Receipts (GDRs).
- CEurobonds.
- DAmerican Depositary Receipts (ADRs).
Show answer & explanationAnswer & explanation
Correct answer: D. American Depositary Receipts (ADRs).
American Depositary Receipts (ADRs) are certificates issued by a U.S. depositary bank that represent shares of a foreign company's stock. They trade on U.S. stock exchanges, allowing U.S. investors to buy shares in foreign companies without directly dealing with foreign exchanges.
Why the other options are wrong
- A. Foreign Currency Options are derivatives used for hedging currency risk, not instruments for raising equity capital or trading foreign company shares.
- B. GDRs are similar to ADRs but trade on global exchanges (outside the U.S.), not specifically U.S. exchanges.
- C. Eurobonds are debt instruments issued in a currency other than that of the country or market in which they are issued, not equity for U.S. exchanges.
American Depositary Receipts (ADRs)
Certificates issued by a U.S. bank representing shares of a foreign stock, allowing that stock to be traded on U.S. exchanges.
- Facilitate U.S. investment in foreign companies.
- Trade in U.S. dollars and clear through U.S. systems.
- Sponsored ADRs are registered with the SEC and trade on exchanges.
Memory trick: ADRs are 'America's Doorway' to foreign stocks.