Series 7 Exam Question 17: Answer and Explanation

Question: 17

Which TWO of the following best describe ADRs?

I. They are receipts for foreign securities trading in U.S. markets

II. They are receipts for U.S. securities trading in foreign markets

III. They are used to help finance foreign corporations

IV. They are used to help finance U.S. corporations

• A. I and III
• B. I and IV
• C. II and III
• D. II and IV

Correct Answer: A

Explanation:

A. ADRs (American Depositary Receipts) are receipts for foreign securities trading in U.S. markets. The underlying securities are typically held in a foreign branch of a U.S. bank. The purchasers receive a receipt from that bank saying that they purchased a specific number of shares of the underlying security. These receipts are marketable, meaning they can be traded separately. ADRs help provide financing for foreign corporations by giving those foreign corporations access to U.S. investor's money.