What are American Depositary Receipts (ADRs) used for?

What are American Depositary Receipts (ADRs) used for?

• A. To represent shares of U.S. companies
• B. To facilitate investment in foreign stocks
• C. To hedge against currency fluctuations
• D. To provide equity financing to domestic companies

Answer: (B)

American Depositary Receipts (ADRs) are designed specifically to facilitate investment in foreign stocks. They serve as a way for U.S. investors to buy shares in non-U.S. companies without having to deal directly with the foreign exchanges or local regulations that may apply to those stocks. An ADR represents a specific number of shares of a foreign company, allowing investors to trade these receipts on U.S. exchanges like they would domestic stocks, thus simplifying the process of international investing. While other options discuss relevant financial concepts, they do not accurately capture the primary purpose of ADRs. For instance, representing shares of U.S. companies is not relevant to ADRs, as these instruments are intended for non-U.S. companies. Hedging against currency fluctuations is an important aspect of foreign investment; however, it is not the primary function of ADRs. Providing equity financing to domestic companies also does not apply, as ADRs are solely concerned with foreign investments and do not offer financing to U.S. companies directly.

American Depositary Receipts (ADRs) are designed specifically to facilitate investment in foreign stocks. They serve as a way for U.S. investors to buy shares in non-U.S. companies without having to deal directly with the foreign exchanges or local regulations that may apply to those stocks. An ADR represents a specific number of shares of a foreign company, allowing investors to trade these receipts on U.S. exchanges like they would domestic stocks, thus simplifying the process of international investing.

While other options discuss relevant financial concepts, they do not accurately capture the primary purpose of ADRs. For instance, representing shares of U.S. companies is not relevant to ADRs, as these instruments are intended for non-U.S. companies. Hedging against currency fluctuations is an important aspect of foreign investment; however, it is not the primary function of ADRs. Providing equity financing to domestic companies also does not apply, as ADRs are solely concerned with foreign investments and do not offer financing to U.S. companies directly.