SIE practice questionmediumCurrency (Exchange Rate) Risk
A U.S. investor holding ADRs of a European company would benefit from:
- AA weakening euro relative to the U.S. dollar
- BA strengthening euro relative to the U.S. dollar✓ Correct answer
- CCurrency exchange rates have no impact on ADR investors
- DA weakening U.S. dollar and a weakening euro simultaneously
Explanation
Why B — A strengthening euro relative to the U.S. dollar
A U.S. investor benefits when the foreign currency (euro) strengthens against the dollar. When euros are converted to dollars, each euro buys more dollars, increasing the dollar value of dividends and the ADR price. Conversely, a weakening euro (A) would reduce the dollar value of the investment. Currency risk is a key consideration for all international investments, including ADRs.
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