13 – ADR/GDR

ADR/GDR – Journal Questions

by R. Venkata Subramani

Journal Questions

Question – 1

Prepare journal entries, general ledger, trial balance, income statement, and balance sheet for the following scenarios.

ADR Conversion to Local Equity Shares—BRL
Mark Antony Inc. traded in Bovespa shares in a Brazilian Stock Exchange through Henry Frank Brothers brokers and the details are as follows.

Trade Details
Date                    Product               CCY                  Quantity           Rate             B/S               Brokerage
15-Jan-X1       Bovespa—ADR        US$                    9,000            32.00              B                 US$ 900
28-Jan-X1       Bovespa—ADR        US$                    5,000            35.00              B                 US$ 525
5-Feb-X1        Bovespa—Local       BRL                  15,000            28.50              S                  BRL 1,280

Other Details
One ADR converts to two local shares in BRL currency.
Settlement: T + 2.
Conversion fees levied by broker to convert ADR shares into local shares for 7,500 ADRs amounts to $1,300.
Functional currency is US$.

Liquidation Methodology
FIFO

FX Rates
Date                   FX Rate
11-Jan-X1         1.6505
13-Jan-X1         1.6525
25-Jan-X1         1.6484
27-Jan-X1         1.6444
31-Jan-X1         1.6311
5-Feb-X1          1.6255
7-Feb-X1          1.6201
28-Feb-X1        1.6150

Market Rate
Bovespa ADR
January 31: $33.50
February 28: $38.00
Bovespa Local
January 31: BRL 26.25
February 28: BRL 32.50

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Question – 2

ADR Conversion to Local Equity Shares—MXN

Mexico Opportunities Fund traded in America Movil shares in a Mexican Stock Exchange through Goldman Sachs and the details are as follows.

Trade Details
Date                  Product                       CCY          Quantity          Rate             B/S Brokerage
12-Jan-X1      America Movil—ADR     US$              1,500            51.50            B US$ 200
22-Jan-X1      America Movil—ADR     US$              3,500            52.50            B US$ 700
24-Jan-X1      America Movil—ADR     US$              1,800            53.50            S US$ 260
5-Feb-X1       America Movil—Local    MXN           30,000            57.50           S MXN 5,200

Other Details
One ADR converts to 10 local shares in MXN currency.
Settlement: T + 2.
Conversion fees levied by broker to convert ADR shares into local shares amount to $810.
Functional currency is US$.

Liquidation Methodology
Weighted average

FX Rates
Date                FX Rate
11-Jan-X1     10.6505
13-Jan-X1     10.6525
25-Jan-X1     10.6484
28-Jan-X1     10.6444
31-Jan-X1     10.6311
5-Feb-X1      10.6255
7-Feb-X1      10.6201
28-Feb-X1    10.6150

Market Rate
America Movil ADR
January 31: $54.50
February 28: $53.00
America Movil Local
January 31: MXN 58.00
February 28: MXN 55.00

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ADR/GDR – Objective Questions

by R. Venkata Subramani

Objective Questions

1. An instrument representing ownership interest in securities of a foreign issuer is referred to as
a. An ownership certificate.
b. A depositary receipt.
c. An ownership receipt.
d. None of the above.

2. Depositary receipts that are traded in an international market other than the United States are referred to as
a. Global depositary receipts
b. International depositary receipts.
c. Open market depositary receipts.
d. None of the above.

3. Issuance of DRs is based on the increase of demand in the
a. Local market.
b. International market.
c. Existing shareholders.
d. All of the above.

4. Each DR is backed by a specific number of an issuer’s local shares. This is referred to as the
a. DR ratio.
b. Issuer’s holding ratio.
c. Market holding ratio.
d. None of the above.

5. Which of the following does not constitute a benefit of DRs for the issuer?
a. Offer a new avenue for raising equity capital.
b. Broaden and diversify a company’s investor base.
c. Enhance a company’s visibility and status.
d. None of the above.

6. Which of the following does not constitute a benefit of DRs for investors?
a. Facilitate diversification into securities of foreign issuers.
b. Eliminate unfamiliar custody safekeeping arrangements.
c. Broaden and diversify the investment base.
d. None of the above.

7. ADRs that do not qualify or are not intended to be listed on stock exchanges are referred to as
a. Level 1 ADRs.
b. Level 2 ADRs.
c. Level 3 ADRs.
d. None of the above.

8. ADRs listed on stock exchanges are referred to as
a. Level 1 ADRs.
b. Level 2 ADRs.
c. Level 3 ADRs.
d. None of the above.

9. Which of the following is not an advantage of ADRs?
a. Cost-effectiveness.
b. Diversification of investment.
c, Reduction in administration cost.
d. None of the above.

10. Which of the following is not associated with the risk involved in ADRs?
a. Political risk.
b. Exchange rate risk.
c. Inflationary risk.
d. None of the above.

11. Level 1 is the most basic type of ADR where the foreign company
a. Wishes its ADR to be listed on the U.S. exchanges alone.
b. Does not wish its ADR to be listed on an exchange.
c. Does not wish its ADR to be listed on an U.S. exchange.
d. Wishes its ADR to be listed on any exchange around the world.
e. Wishes its ADR to be listed on any exchange other than U.S. exchanges.

12. Regulation S shares cannot be held or traded by any ______________, as defined by SEC Regulation S rules.
a. Non-U.S. person.
b. U.S. person.
c. European person.
d. U.S. investment firm.
e. Non-U.S. investment firm.

13. In ADR trading, when the investor places the buy order and when the broker executes the same, it becomes a binding contract between the investor and the
a. Foreign company.
b. Broker.
c. Securities Exchange Commission.
d. Stock exchange.
e. All the above.

14. The process of valuation of ADRs is known as portfolio valuation, when the market rate at the end of the period is determined from the
a. Primary stock exchange where the shares are traded.
b. Secondary market.
c. Prime broker.
d. Broker.
e. Credit rating companies.

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ADR/GDR – Summary

by R. Venkata Subramani

A depositary receipt (DR) represents an ownership interest in securities of a foreign issuer typically trading outside its home market. ADR is a tradable instrument, and the depositary receipts that are trading in the United States are known as American depositary receipts, or ADRs. Depositary receipts that are traded in an international market outside the [...]

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