Lesson 4 of 6 · All lessons in this module
- Common shares: voting rights, share classes, callable and putable shares
- Dual class shares: splitting economic rights from voting rights
- Investing in foreign equity: direct, depository receipts, GRS and BLDRs
- Depositary receipts in practice: ratios, implied exchange rates and when arbitrage fails
- The shareholder voting process: proposals, record date and proxy votes
- Proxy advisors, shareholder proposals and investor stewardship
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 4 of 6 · 14 min
Depositary receipts in practice: ratios, implied exchange rates and when arbitrage fails
A depositary receipt should trade at the underlying share price, scaled by the DR ratio and converted at the exchange rate; when conversion, liquidity or sanctions block arbitrage, the two prices can drift apart.
In short
- Investors with a home asset bias hold too much domestic equity; foreign shares can be bought directly or indirectly through depositary receipts.
- Direct investing means local accounts, local rules, foreign trading hours, language barriers and local-currency cash flows, so it suits large institutions more than individuals.
- A DR's fair price = shares per DR × home share price × exchange rate. Read the ratio carefully: '1 share : 4 DRs' means each DR is a quarter of a share.
- Dividing the DR value by the home share value gives an implied exchange rate; comparing it with the market rate shows whether the DR is mispriced.
- DRs are named after the market where they trade: ADRs (US, the oldest and largest), EDRs (non-European shares traded in EUR in Europe), GDRs (outside both home country and US).
- Arbitrage keeps prices aligned only if DRs can be converted into shares and both markets are liquid; conversion bans, thin trading or sanctions can leave DRs at deep discounts or worthless.
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