All the following statements are true for ADRs except: a. they are registered foreign securities traded...

All the following statements are true for ADRs except: a. they are registered foreign securities traded in the U.S. b. they are taxable securities c. they always trade at a discount or premium over their original securities adjusted for exchange rates d. they depend on exchange rate movements in addition to other factors.

Expert Solution

All the following statements are true for ADRs except:
c. they always trade at a discount or premium over their original securities adjusted for exchange rates

The correct statement should be:
c. they sometimes trade at a discount or premium over their original securities adjusted for exchange rates

The reason being:
ADRs sometimes trade at a premium or a discount over their original securities, but this difference is soon eliminated by the process of arbitraging. In the case of underlying share trading at premium in the international market, one can borrow and go short in the international market, while simultaneously going long in the local market. It will than require to convert local share into GDR/ADR and cancelling the borrowed position. The opportunity remains for about 10-15 minutes, however taking a position requires a lot of understanding of the markets and underlying security.

Hence, the correct answer is Option C.

jeff jeffy answered 1 year ago

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