Currency Risk in Foreign Stocks Purchased as U.S. ADRs
Summary
The note explains why an American investor who buys a U.S.-traded receipt for a Japanese company can still face foreign-exchange risk. Although the purchase and trading price are quoted in dollars, the receipt’s value reflects the underlying Japanese shares and the exchange rate between the yen and the dollar.
It illustrates the relationship with a hypothetical: a gain in Toyota’s yen share price can be offset for a dollar-based investor by a weakening dollar against the yen. Conversely, dollar appreciation can reduce the receipt’s dollar value relative to the Tokyo-listed shares. The explanation clarifies that a U.S. listing does not remove exposure to the underlying currency. It focuses on this currency channel and does not quantify its size or discuss other risks in detail.
Key ideas
- A U.S.-traded receipt for a foreign company can retain exposure to the company’s home currency.
- Changes in the exchange rate can offset or amplify returns in the underlying foreign shares.
- A dollar trading price does not by itself eliminate currency risk for a U.S. investor.
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Full text
# Types of risk for stock investing # Types of risk for stock investing Question: We suppose that the Toyota is traded in Tokyo in Japanese yen and represented by the price process $(S_t)$ t≥0, and in New York in US dollars and represented by the price process $(U_t)$ t≥0. What are the sources of risk faced by an American investor who has bought the Toyota stock in New York at the price Ut? My attempt: Market Risk - Toyota share pricing falling Systemic Risk - Collapse of entire financial system Liquidity risk - Not being able to exit position Just wanted to check that there is not any FX risk here, as the US investor has bought $ donimated stock, so it is irrelevant that Toyota is also traded in Japanese markets in Yen. ## Answer by amdopt (score 4, accepted) https://quant.stackexchange.com/a/33319 > Just wanted to check that there is not any FX risk here, as the US investor has bought $ donimated stock, so it is irrelevant that Toyota is also traded in Japanese markets in Yen. An American investor stills has currency risk. A simple way of thinking about it might be to consider what would happen if Toyota share price went up 1% but USD declined by 1% vs JPY. The US ADR (American Depository Receipt--this is what is listed in the US and what the American investor buys in your example) will not move the same way as it's Tokyo traded counterpart would because of the currency fluctuation baked into the ADR. On the flip side, if the American investor bought the ADR and the USD appreciated vs JPY the American investor could outperform the Japanese listed stock. EDIT: After posting an answer I did a quick search of SE and saw that this question has already been asked and answered here as well: https://money.stackexchange.com/questions/22309/am-i-exposed-to-currency-risk-when-i-invest-in-shares-of-a-foreign-company-that
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