Series 7 practice questionmediumEquity Securities — ADRs — Currency Risk
An investor holding ADRs of a Japanese company is most exposed to which additional risk compared to holding domestic stocks?
- ACurrency exchange rate risk✓ Correct answer
- BInflation risk
- CReinvestment risk
- DPrepayment risk
Explanation
Why A — Currency exchange rate risk
ADR holders face currency exchange rate risk because the underlying shares are denominated in the foreign currency (in this case, Japanese yen). Even if the stock price remains stable in yen, a weakening yen relative to the US dollar will reduce the ADR's value in dollars. This currency risk is the primary additional risk associated with ADR investments.
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