Explain depository receipts and investing in foreign equities
The idea
A depository receipt is a security issued in one market representing shares held in another, letting an investor obtain foreign exposure in their own market, currency and settlement system. A sponsored receipt is created with the cooperation of the issuing company and carries voting and information rights; an unsponsored one is created by a depository bank without that cooperation and generally does not. Global depository receipts trade outside both the issuer's and the United States markets. The receipt does not remove currency risk: its price reflects the foreign share price translated at the prevailing rate.
A practice question
What does a depository receipt represent?
- A loan to a foreign companyWhy not: A receipt is an ownership claim, not a debt. The holder takes equity risk on the underlying shares.
- Foreign shares held on deposit — correct
- An option to buy foreign sharesWhy not: No optionality is involved: the underlying shares already sit with the depository bank.
The underlying shares sit with a depository bank in the home market, and the receipt is a claim on them that trades locally.
A harder one
What is the main difference between sponsored and unsponsored depository receipts?
- Sponsored receipts are created with the issuer's cooperation and carry voting and information rights — correct
- Sponsored receipts trade only in the United StatesWhy not: Sponsorship is about the issuer's participation, not the listing venue; sponsored programmes exist outside the United States too.
- Unsponsored receipts represent a larger number of underlying sharesWhy not: The ratio of shares to receipts is a design choice in either programme and is unrelated to sponsorship.
Without the company's participation, the depository bank cannot pass through the rights that come with ownership, so the holder has economic exposure but little else.
The hardest tier
Does buying a depository receipt eliminate currency risk for the investor?
- Yes, because it is denominated in the investor's own currencyWhy not: Denomination is not exposure. The local-currency price is the foreign price translated, so it moves when the exchange rate moves.
- Yes, because the depository bank hedges the exposureWhy not: The bank holds the shares and administers the programme. It runs no hedge on the holder's behalf.
- No, because its price reflects the foreign share price translated at the prevailing exchange rate — correct
The denomination changes but the exposure does not. A fall in the foreign currency shows up directly in the receipt's local-currency price.
In the app: 9 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →