SIE Exam Question 453: Answer and Explanation

Question: 453

An investor has purchased shares of a foreign company through an ADR. Which of the following is not true?

• A. The dividend will be paid in U.S. dollars.
• B. The investor is subject to currency risk.
• C. The ADR may represent one or more shares of the company's common stock.
• D. The investor may elect to exchange the ADR for the underlying common shares.

Correct Answer: A

Explanation:

A: An ADR may represent more than one share of the company's common stock and may be exchanged for the ordinary common shares. The dividend, however, is paid in the foreign currency and is received by the investor in U.S. dollars; as a result, the investor is subject to currency risk.