Depository Receipts

TemCo Brokerage Company buys shares of foreign companies that are trading on their own local exchange because his customer, Glen, is interested in diversifying his portfolio. They make the investment through a __depository receipt__ (DR). A DR is a type of security that trades locally but represents foreign equity ownership. First, the broker delivers the shares to a custodian bank in the foreign country. Next, the broker has the __depository bank__, the bank in TemCo's country that is responsible for the administration and record keeping, issue a depository receipt on the basis of the shares physically held by the custodian bank. The receipts are then traded on TemCo's local exchange. They trade like any other stock share. What do you suppose is the main underlying reason for the existence of depository receipts?

Yes. Exchange rate fluctuations make international trading a bit cumbersome for both the seller and the buyer.

No. Another method for companies to invest is through making foreign direct investments. Exchange rate fluctuations complicate matters for both buyers and sellers.

Suppose Glen calls TemCo and finds out that there are DRs already on his local market that correlate well with his risk tolerance and required rate of return. He has TemCo purchase these on his behalf. What do you believe Glen will experience with respect to the foreign company whose stock he now owns?

No, this is simply not true. Foreign companies may or may not pay dividends to their investors. If the foreign company associated with a specific DR pays dividends, Glen will see one.

Yes, one of the benefits of having an equity stake in a foreign company in this manner is that dividends that are paid in the investor's local currency and no exchange losses are realized. This is because the DR security is trading equivalently on the local market. Other benefits may include investor voting rights and familiar trading procedures.

No. If dividends are paid by the foreign company, it is paid in the local exchange currency. This is because the DR security is trading equivalently on the local market.

__Unsponsored__ DRs are issued without a formal agreement between the depository bank and the foreign company. __Sponsored__ DRs are issued and supported by the foreign company. Support is given with corporate related documentation such as an annual report. The type of support that is provided gives the investor confidence in investing in the foreign company.

To summarize: [[summary]]

In this case, TemCo simply would purchase a bulk lot of shares from whatever foreign company may complement its portfolio, and through the custodian bank and the depository bank, have shares issued on a local exchange. TemCo can then broker and manage these DRs within its investor base.

This is the sole method for foreign companies to obtain foreign investments

Depository receipts simplify investing in foreign countries

Dividends cannot be paid on DR issuances

Dividends are to be paid in Glen's local currency

Dividends are to be paid in foreign currency

Continue

Continue

Continue

Continue