D. Discuss the methods for investing in non‐domestic equity securities

Question 1

Investors who buy foreign stock directly on a foreign stock exchange (Advantages: Increases publicity for products and services
– Increases liquidity of stock
– Increases firm transparency)

Answer 1

receive a return denominated in a foreign currency, must abide by the foreign stock exchange’s regulations and procedures, and may be faced with less liquidity and less transparency than is available in the investor’s domestic markets. Investors can often avoid these disadvantages by purchasing depository receipts for the foreign stock that trade on their domestic exchange.

Question 2

GDR’s

Answer 2

Global depository receipts are issued outside the United States and outside the issuer’s home country.

Global Depository Receipts (GDRs)
– Ownership in a foreign firm, issued outside the U.S. and outside the
issuer’s home country, usually London or Luxembourg. A bank
acquires and deposits shares of the company, then issues receipts
representing ownership of a specific number of the foreign shares.
– Usually denominated in U.S. dollars and can be sold to U.S.
institutional investors.
– Not subject to foreign ownership and capital flow restrictions by
issuing company’s home country as they are sold outside that
country.

Global depository receipts are most likely issued: outside the issuer’s home country and denominated in U.S. dollars.

Global depository receipts are issued outside the U.S. and the issuer’s home country and are most often denominated in U.S. dollars. Depository receipts issued in the United States and denominated in U.S. dollars are called American depository receipts. Global registered shares are denominated in the home currencies of the exchanges on which they trade.

Question 3

ADR’s

Answer 3

denominated in U.S. dollars and are traded on U.S. exchanges.

ADRs (American Depository Receipts )
– US $ denominated security that trades like a common share on U.S.
exchanges.
– Some ADR’s enable foreign companies to raise capital in the US$.
– Trade in the U.S.: The security on which the ADR is based is the
American depository share, which trades in the firm’s domestic
market.
– (Exhibit 16 Page 172 summarizes four types of ADRs): OTC, NYSE able
to raise US capital, and NYSE no capital raising, and Private

Question 4

GRshares

Answer 4

Global registered shares are common shares of a firm that trade in different currencies on stock exchanges throughout the world.

Global Registered Share (GRS)
– Common share that is traded on different stock exchanges around
the world in different currencies (vs GDR’s which typically US$).
– GRS represent actual ownership interest can be traded anywhere.
– Currency conversions are not needed to purchase or sell them,
because identical shares are traded in different currencies.

Question 5

Baskets of listed depository receipts (BLDR)

Answer 5

are exchange-traded funds that invest in depository receipts.

Basket of Listed Depository Receipts (BLDR)
– Exchange‐traded fund (ETF) that is a collection of DRs.
– (ETF is a security that tracks an index but trades like an individual
share on an exchange.)

A basket of listed depository receipts (BLDR) is best described as a(n): exchange traded fund of depository receipts.
A basket of listed depository receipts (BLDR) is an exchange traded fund that represents a portfolio of depository receipts.

Question 6

Integrated Markets

Answer 6

When capital flows freely across borders

reduced capital barriers improves equity market
performance

Question 7

DFI Obstacles

Answer 7

Denominated in a foreign currency – exchange rate risk
– Illiquid, shares may be more thinly traded
– Potentially less strict reporting requirements of local jurisdiction
increasing investor risk
– Possible impact of foreign market rules

Question 8

Depository Reciepts General

Answer 8

Depository Receipts (DRs)
– Security trades like an ordinary share on local exchange
representing interest in foreign firm
– Traded in the markets of other countries in local market
currencies.
– Sponsored DR – Investors can vote shares. Issuer has better
clarity on its shareholder base.
– Unsponsored DR – Held by bank/trustee. Investors cannot vote.
• Methods for investing in foreign companies are:
– Global depository receipts (GDRs)
– American depository receipts (ADRs)
– Global registered shares (GRSs)
– Baskets of listed depository receipts (BLDRs)

Unsponsored Depository Reciept: A security that represents an equity share in a foreign firm and for which the voting rights are retained by the depository bank, is a(n): In an unsponsored DR, the depository bank retains the voting rights of the equity shares of the foreign firm. In a sponsored DR, the investor in the DR has the voting rights. For an American depository receipt, an American depository share is the underlying security that trades in the issuing firm’s domestic market. A global registered share is an equity security that trades in the local currencies on stock exchanges around the world.