Discussion
Which of the following is not associated with the risk involved in ADRs?
Answer: D
Correct answer: None of the above.
All three are risks that attach to an ADR, so none of them is unassociated with it.
Political risk is the risk that events in the issuer's country - expropriation, capital controls, instability - affect the underlying shares. Exchange rate risk arises because the underlying shares and their dividends are denominated in the home currency while the receipt trades in dollars. Inflationary risk in the home economy erodes the real value of those earnings. The depositary structure removes settlement inconvenience, not the risks of the underlying investment.
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