FINRA Practice Exam 2025 – All-in-One Guide to Succeed in Financial Industry Certification!

Investing in American Depository Receipts (ADRs) involves exposure to currency risk due to the fact that ADRs are linked to the performance of foreign stocks. When a U.S. investor buys an ADR, it represents shares of a non-U.S. company, and the underlying shares are traded in their local currency. Even though ADRs are traded in U.S. dollars, the value of the underlying foreign stock can fluctuate based on its local currency. If the local currency depreciates against the U.S. dollar, this can negatively impact the value of the ADR when converted back to dollars.

Therefore, it is vital to recognize that U.S. investors are indeed facing currency risk when they invest in ADRs. The performance of the investment is not solely dependent on the performance of the foreign company but also on the exchange rate movements between the foreign currency and the U.S. dollar.

In contrast, the other statements suggest that currency risk is either mitigated or eliminated, which does not reflect the reality of investing in ADRs. While the depositary bank plays a role in converting foreign dividends to U.S. dollars, it does not eliminate currency risk. Similarly, claiming that U.S. investors are protected from or that currency risk is eliminated is