Are American Depository Receipts (ADR's) affected by the US markets they are traded on?
I have a question about ADR's which I have been unable to find a suitable answer to on my own.
When you trade ADR's on a stock market, you are trading a foreign stock in US Dollars on a US stock exchange. The actual foreign securities are held by a US bank and then converted to US$ to be sold within US markets.
MY QUESTION IS...Since the actual company, and company stock, is located in a different country, would the stock follow the overall market trends of the country it's located in, or would it follow US market trends, following the markets it's being traded on.
For example, let's say I buy a Chinese ADR. This ADR is traded on the NASDAQ in the US. In the event of a market crash or consolidation for NASDAQ, would the stock be as affected as other US companies listed on the exchange? or would the ADR tend to follow performance similar to the Shanghai Stock Exchange, regardless of what the NASDAQ is doing?
This has been seriously bugging me, Thank You!
- JerryLv 77 years agoFavorite Answer
First you need to understand the arbitrage relationship between the ADR (in US dollars) and the underlying security (in home currency). ADRs fully reflect the risk of both the underlying security and changes in foreign exchange rates.
ADR = Ordinary * fx_rate * ADR_to_ord_ratio
The ADR_to_ord_ratio reflects that an ADR may represent 1 share, many shares, or a fractional share.
Next you need to realize that there are strong correlations across international stock markets. As the US is the largest market, foreign markets tend to follow its moves.
Now to the case of your Chinese ADR. Its price reflects the price of the Chinese underlying share and the USD/Yuan exchange rate. However, to the extent that the market expects a strong move on NASDAQ to impact overseas markets, the ADR may be correlated with NASDAQ.