What would be the effect of a foreign currency appreciation on an ADR on the New York Stock Exchange?
If the Chinese Yuan (Renminbi) was to appreciate by 5% in a year, what would you expect the price of an American Depository Reciept of a Chinese company on the New York Stock Exchange to do? More specifically, if the ADR represents an underlying group of Hong Kong shares (denominated in Hong Kong Dollars, which are pegged to US Dollars), for a Chinese company like PetroChina, and would it be roughly proportional to the degree of currency appreciation?
I'd appreciate if you explained the intuition behind your answer as well.
- JerryLv 79 years agoFavorite Answer
Your question includes multiple issues.
There is a simple formula for the relationship between ADR price and underlying stock price.
ADR_price = underlying_stock_price * FX * ADR_to_ord_ratio
ADR_to_ord_ratio is the number of shares each ADR represents. Each ADR may be one share, a fraction, or a multiple.
Since the Hong Kong Dollar and US Dollar are fixed, expect no change based on currency.
The second issue is the impact of yuan/dollar change on profits of PetroChina. That is not certain, but I expect it would be small as most PetroChina output is consumed in China rather than exported.