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MEANING “International Finance is an area of financial economics that deals with monetary interactions MEANING “International Finance is an area of financial economics that deals with monetary interactions between two or more countries”.

International Finance has become a specialised subject dealing with the study of – ØForeign International Finance has become a specialised subject dealing with the study of – ØForeign Exchange Markets ØExchange Rates ØMNC Financial System ØRisk Management ØInternational Accounting System

1. FOREIGN EXCHANGE MARKETS… Foreign exchange market refers to the market for national currencies 1. FOREIGN EXCHANGE MARKETS… Foreign exchange market refers to the market for national currencies of different countries in the world. Functions of Foreign Exchange Market: a. Transfer function b. Credit function c. Hedging function

Types of Transactions Types of Transactions

a) SPOT TRANSACTIONS Spot market foreign exchange is that market which handles only spot a) SPOT TRANSACTIONS Spot market foreign exchange is that market which handles only spot transactions or current transactions. PRINCIPAL CHARACTERISTICS: a. Period of transaction- daily nature b. Rate of exchange which is determined in spot market is known as spot rate of exchange

b) FORWARD MARKET Forward Market includes transactions that call for delivery at a fixed b) FORWARD MARKET Forward Market includes transactions that call for delivery at a fixed future date at an exchange rate that is fixed at the time the contract is entered into. PRINCIPAL CHARACTERISTICS: a. It only caters to forward transactions b. The exchange rate at which forward transactions are to be honoured is knows as foreign exchange rate.

c) SWAP It involves a simultaneous spot purchase and forward sale of a foreign c) SWAP It involves a simultaneous spot purchase and forward sale of a foreign currency against another and vice versa. d) OPTIONS These are the instruments that give the holder the right but no obligation to buy or sell an asset at a pre-specified price on or upto a specified date. e) CURRENCY FUTURE It is a standardized foreign exchange derivative contract on a recognized stock exchange to buy or sell one currency against another on a specified future date at a specified price.

2. EXCHANGE RATE The rate at which one unit of currency of a country 2. EXCHANGE RATE The rate at which one unit of currency of a country can be exchanged for a number of units of currency of another country. Like, $1=63 Rs = 2 cents TYPES OF EXCHANGE RATE FIXED FLOATING

a) FIXED EXCHANGE RATE…. Fixed rate of exchange refers to the rate of exchange a) FIXED EXCHANGE RATE…. Fixed rate of exchange refers to the rate of exchange as fixed by the govt. Historically it has two important variants: • Gold Standard System of Exchange Rate • Bretton Wood System of Exchange Rate

b) FLEXIBLE EXCHANGE RATE SYSTEM: Flexible exchange rate is the rate which is determined b) FLEXIBLE EXCHANGE RATE SYSTEM: Flexible exchange rate is the rate which is determined by the demand for and supply of different currencies in the foreign exchange market. R=f (D, S) R= exchange rate D= demand foreign currencies S= Supply of foreign currencies

EXCHANGE QUOTATION EXCHANGE QUOTATION

DIRECT QUOTE A direct quote expresses the home currency price of a certain quantity DIRECT QUOTE A direct quote expresses the home currency price of a certain quantity of the foreign currency. In this method the no of units of foreign currency is kept constant and home currency units are variable. INDIRECT QUOTE In Indirect quote, any change in the exchange rate will be shown by variation in the units of foreign currency.

3. MULTINATIONAL FINANCIAL SYSTEM Mutinationals are the single most largest players responsible for international 3. MULTINATIONAL FINANCIAL SYSTEM Mutinationals are the single most largest players responsible for international business and international finance is concerned with studying and understanding the financial system of these multinational corporations. IMPORTANT VARIABLES: Ø Mode of transfer of funds Ø Planning for payment schedule Ø Managing the firm value

4. RISK MANAGEMENT Ø The earnings of firms engaged in international business are subject 4. RISK MANAGEMENT Ø The earnings of firms engaged in international business are subject to fluctuations due to floating exchange rate. Ø To protect itself from this uncertainty the firm will opt for hedging techniques.

5. INTERNATIONAL ACCOUNTING SYSTEM International finance also studies the techniques of preparing consolidated financial 5. INTERNATIONAL ACCOUNTING SYSTEM International finance also studies the techniques of preparing consolidated financial statements of MNC’s.

NEED AND IMPORTANCE OF INTERNATIONAL FINANCE NEED AND IMPORTANCE OF INTERNATIONAL FINANCE

 • DIMINISHING NATIONAL BOUNDARIES: 1. 2. Governments are imposing fewer restrictions on movement • DIMINISHING NATIONAL BOUNDARIES: 1. 2. Governments are imposing fewer restrictions on movement of goods and services. World trade organization has lowered import duties.

 • RISE OF GLOBAL COMPANIES FIRMS HAVE STARTED ADOPTING A WORLD WIDE APPROACH • RISE OF GLOBAL COMPANIES FIRMS HAVE STARTED ADOPTING A WORLD WIDE APPROACH TO THE MARKETS AND PRODUCTION 2. ENTIRE WORLD IS A SINGLE MARKET EG: HONDA HAS MOVED A CONSIDERABLE PART OF ITS AUTOMOBILE PRODUCTION TO CHINA IN ORDER TO GET COMPETITIVE ADVANTAGE OF LOW COSTS. 1.

RISING WORLD TRADE ORGANISATION THE WORLD TRADE VOLUMES HAVE INCREASED SHARPLY OVER THE LAST RISING WORLD TRADE ORGANISATION THE WORLD TRADE VOLUMES HAVE INCREASED SHARPLY OVER THE LAST FEW YEARS. 2. INCREASE IN IMPORTS AND EXPORTS HAS RESULTED IN LARGE VOLUME OF CROSS BORDER MONETARY MOVEMENT. 1.

Growth of world trade (US $ billions) REGION EXPORTS IMPORTS 2011 2012 2013 World Growth of world trade (US $ billions) REGION EXPORTS IMPORTS 2011 2012 2013 World 18329 18405 18817 18415 18526 18797 Developed Economies 9627 9363 9578 10490 10236 10196 Developing Economies 7890 8219 8432 7338 7676 7981 Transition Economies 810 822 805 587 614 618

 • INCREASED CROSS-BORDER CAPITAL FLOW FDI Flows by region (in US $ Million • INCREASED CROSS-BORDER CAPITAL FLOW FDI Flows by region (in US $ Million ) REGION FDI Inflows FDI Outflows 2011 2012 2013 World 1700 1330 1451 1711 1346 1410 Developed Economies 880 516 565 1215 852 857 Developing Economies 724 729 778 422 440 454 Transition Economies 94 84 107 73 53 99

7. CHANGING NATURE OF CAPITAL AND MONEY MARKETS RISING VOLUME OF COMMERCIAL TRANSACTION AT 7. CHANGING NATURE OF CAPITAL AND MONEY MARKETS RISING VOLUME OF COMMERCIAL TRANSACTION AT INTERNATIONAL LEVEL HAS LED TO THE CREATION OF GIANT INTERNATIONAL FINANCIAL MARKET 1.

6. EXPANDING TECHNICAL INFRASTRUCTURE 1. Allows massive financial transaction to materialize online with in 6. EXPANDING TECHNICAL INFRASTRUCTURE 1. Allows massive financial transaction to materialize online with in minutes 2. Allows the bank across the world to access the regional or main server of SWIFT and transfer the information regarding the financial transaction to the appropriate location

7. GLOBAL CONSUMERS AND GLOBAL COMPETITION : Dwindling barriers between the markets, rapid economic 7. GLOBAL CONSUMERS AND GLOBAL COMPETITION : Dwindling barriers between the markets, rapid economic development have made consumers expectations similar across countries. 2. Consumers are awakened to the possibilities of newer, better and customized products. 1.

8. DEVELOPMENT OF SUPPORTING FINANCIAL INFRASTRUCTURE 1. Increased pace of international business has led 8. DEVELOPMENT OF SUPPORTING FINANCIAL INFRASTRUCTURE 1. Increased pace of international business has led to the development of supporting financial services. 2. Universal banking concept has emerged. 3. Geographical and functional integration of the banks made international finance important.

9. INCREASED COMPETION AT THE GLOBAL LEVEL 1. Companies are facing intense competition and 9. INCREASED COMPETION AT THE GLOBAL LEVEL 1. Companies are facing intense competition and survival has become tough. 2. To become as a global player knowledge and understanding of different economies and their market is essential. 3. International finance identify opportunities and develop them for the company’s benefit.

10. DOMESTIC COMPANIES TOO FEEL THE HEAT 1. Understanding of international finance is needed 10. DOMESTIC COMPANIES TOO FEEL THE HEAT 1. Understanding of international finance is needed not just by company having international markets but also by domestic companies. 2. Domestic companies must be exposed to the risks involved in dealing with foreign currencies. 3. Domestic companies having no dealing with international markets would need to understand their competitors strengths and weakness.

RECENT TRENDS IN INTERNATIONAL FINANCE RECENT TRENDS IN INTERNATIONAL FINANCE

ØDe-regulation of financial markets ØCross Border M & A activity ØRising Popularity of Euro ØDe-regulation of financial markets ØCross Border M & A activity ØRising Popularity of Euro Markets ØEmergence of MNC’s from Emerging Economies ØIntegration of Markets Globally

1. De-Regulation of Financial Markets. There has been a trend towards internationalisation of money 1. De-Regulation of Financial Markets. There has been a trend towards internationalisation of money and capital markets The US & most of Europe have almost free financial markets, the rest of the world has gradually move toward it. At the same time a window has been opened for the companies in the developing countries to tap offshore markets to raise debt and equity finance.

2. Cross Border M & A Activity The past few years have also seen 2. Cross Border M & A Activity The past few years have also seen a rise in the global FDI level and most of this investment has been driven by cross border mergers and acquisitions. The M&A Activities witnessed an increased till 2007 due to strong economic conditions world wide.

3. Rising Popularity of Euro Markets The strict regulations in US , along with 3. Rising Popularity of Euro Markets The strict regulations in US , along with other factors led to the development of Euro dollar markets, which has now expanded to include other currencies also. Euro markets are virtually free from any regulation and hence become a popular choice for world MNC to look towards them for financing their plans.

4. Emergence of MNC’s from Emerging Economies ØThe last two decades have also seen 4. Emergence of MNC’s from Emerging Economies ØThe last two decades have also seen the emergence of a large no of Multinational Corporations from emerging economies. ØIt has been observed that of the top 100 Infrastructure Multinational Corporations of the World, 22 were headquartered in a developing or a transition economy like Hong Kong, Malaysia, Singapore etc,

5. Integration of Markets Globally The world is witnessing an increasing integration of financial 5. Integration of Markets Globally The world is witnessing an increasing integration of financial markets. This gives the investors the freedom and opportunity to raise funds from and to invest anywhere in the world, through any type of instruments. Greater integration of the financial markets has resulted in a redistribution of financial resources from the surplus countries to the deficit countries.

SOURCES OF INTERNATIONAL FINANCE SOURCES OF INTERNATIONAL FINANCE

EXTERNAL COMMERCIAL BORROWING ECB refers to commercial loans in the form of bank loans, EXTERNAL COMMERCIAL BORROWING ECB refers to commercial loans in the form of bank loans, buyers credit , suppliers credit availed of from non-resident lenders with the minimum average maturity of 3 years.

ECB can be ACCESSED in two ways: AUTOMATIC ROUTE APPROVAL ROUTE ECB can be ACCESSED in two ways: AUTOMATIC ROUTE APPROVAL ROUTE

ECB for investment in real sectorindustrial sector, infrastructure sector and specified service sectors in ECB for investment in real sectorindustrial sector, infrastructure sector and specified service sectors in India are under the Automatic Route, i. e. do not require Reserve Bank / Govt. of India approval. In case of doubt as regards eligibility to access the Automatic Route, applicants may take recourse to the Approval Route.

BASIS 1) Eligible borrowers AUTOMATIC ROUTE APPROVAL ROUTE • Corporate registered under the companies BASIS 1) Eligible borrowers AUTOMATIC ROUTE APPROVAL ROUTE • Corporate registered under the companies act are eligible to raise ECB. • Individuals, trusts and Nonprofit making organisations are not eligible to raise ECB. • Units in SEZ are also allowed to raise ECB for their own requirement. • Financial institutions dealing exclusively with infrastructure or export finance. • Banks & financial institutions which has participated in the textile or steel sector. • Non Banking financial companies with minimum average maturity of 5 years. • Foreign Currency Convertible Bonds • Multi- State Co-operate Societies. • Industrial sector & Infrastructure sector • Non-Govt. organisations.

BASIS 2)Recognised lenders AUTOMATIC ROUTE • International banks • International capital markets • Multilateral BASIS 2)Recognised lenders AUTOMATIC ROUTE • International banks • International capital markets • Multilateral financial institutions • Export credit agencies • Suppliers of equipments • Foreign equity holders APPROVAL ROUTE • NGOs engaged in micro finance activities areo ECB would have to furnish a Certificate of due diligence ü o USD 5 millionminimum equity of 25% o More than USD 5 million- minimum equity of 25% and debt equity ratio not exceeding 4: 1 ü Lender maintains an a/c with the bank for atleast period of 2 yrs. Submit documents as evidence such as audit statement of accounts & income tax return.

BASIS 3) Amount & maturity AUTOMATIC ROUTE • Maximum amount- USD 750 millions • BASIS 3) Amount & maturity AUTOMATIC ROUTE • Maximum amount- USD 750 millions • Min. for 3 yrs- USD 20 million in financial year. • maturity for 5 yrs- USD 20 million to USD 500 million APPROVAL ROUTE • More than 10 years. USD 250 millions • Infrastructure sector. ECB upto USD 100 million. o industrial sector- ECB upto USD 50 million. • NGOs engaged in micro finance activities can raise ECB upto USD 5 million. • In service sector- ECB upto USD 100 million.

BASIS 4) All- incost ceilings AUTOMATIC ROUTE • Rate of interest • Other fees BASIS 4) All- incost ceilings AUTOMATIC ROUTE • Rate of interest • Other fees and expenses Except: o Commitment fee o Pre payment fee • For 3 years upto 5 years – 200 basis point • More than 5 years– 350 basis point APPROVAL ROUTE Same as in Automatic Route

BASIS 5) Guarantees 6) Parking of ECB proceeds over seas 7) Prepayment AUTOMATIC ROUTE BASIS 5) Guarantees 6) Parking of ECB proceeds over seas 7) Prepayment AUTOMATIC ROUTE • Issuance of guarantee • Letter of credit • Letter of undertaking • Letter of comfort by banks • ECB proceeds parked overseas can be invested in liquid assets area) deposits with overseas branch of AD in India. b)Treasury bills and other monetary instuments • ECB upto USD 500 millions allowed by AD banks without prior approval of RBI. APPROVAL ROUTE • Same as in Automatic Route • ESB exceeding USD 500 million would be considered by the Reserves Bank.

BASIS 8) Refinancing of an existing ECB 9) Debt Servicing AUTOMATIC ROUTE APPROVAL ROUTE BASIS 8) Refinancing of an existing ECB 9) Debt Servicing AUTOMATIC ROUTE APPROVAL ROUTE By raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained. Same as in Automatic Route. The AD Bank has the general commission to make remittances of installments of principal, interest and other charges in confirmity with ECB guidelines issued by government. Same as in Automatic Route.

BASIS 10) Procedure AUTOMATIC ROUTE • Borrowers may enter into loan agreement under ECB BASIS 10) Procedure AUTOMATIC ROUTE • Borrowers may enter into loan agreement under ECB guidelines for raising ECB. • Borrower must obtain Loan Registration Number from the RBI. APPROVAL ROUTE Applicants are required to submit an application form to ECB through designated AD Bank to the Chief General Manager-in-charge, Foreign Exchange Department, RBI, Central Office along with necessary documents.

BASIS 11) End-Use AUTOMATIC ROUTE • ECBs are permitted for – a) Investment in BASIS 11) End-Use AUTOMATIC ROUTE • ECBs are permitted for – a) Investment in industrial sector, infrastructure sector and specified service sectors. b) Overseas can direct investment in joint venture. c) For import of services, technical know-how and payment of license fees. • For Acquisition of shares in the disinvestment process to the public under the government disinvestment program of PSU shares. APPROVAL ROUTE Same as in Automatic Route

BASIS 12) Endsuses not permitted AUTOMATIC ROUTE • For on-lending or investment in capital BASIS 12) Endsuses not permitted AUTOMATIC ROUTE • For on-lending or investment in capital market or acquiring a company in India by a corporate. • Not permitted in Real Estate. • Not permitted for working capital, general corporate Purpose and repayment of existing rupee loans. APPROVAL ROUTE Same as in Automatic Route.

Foreign Currency Convertible Bonds (FCCB) MEANING: It refers to a bond issued by an Foreign Currency Convertible Bonds (FCCB) MEANING: It refers to a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

Conditions for Issuance. . Having the maturity of the FCCB not less than 5 Conditions for Issuance. . Having the maturity of the FCCB not less than 5 years. The call & put option, if any , shall not be exercisable prior to 5 years Issuance of FCCBs only without any warrants attached The issue related expenses not exceeding 4% of issue size and in case of private placement , shall not exceed 2% of the issue size, etc. as required in terms of Notification FEMA No. 120/RB-2004. FCCBs are also subject to all the regulations which are applicable to ECBs.

Redemption of FCCBs TERMS & CONDITIONS: • Fresh ECBs / FCCBs shall be raised Redemption of FCCBs TERMS & CONDITIONS: • Fresh ECBs / FCCBs shall be raised with the stipulated average maturity period and applicable all-in-cost being as per the extant ECB guidelines. • The amount of fresh ECB / FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs. • The fresh ECCB / FCCB shall not be raised 6 months prior to the maturity date of the outstanding FCCBs. • The purpose of ECB/ FCCB shall be clearly mentioned as ‘Redemption of outstanding FCCBs’ in form 83 at the time of obtaining loan registration no from the Reserve Bank. • ECB/FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route;

American Depository Receipts (ADR) ADR is a stock that trades in stock exchanges in American Depository Receipts (ADR) ADR is a stock that trades in stock exchanges in the United States. A negotiable certificate issued by a U. S. bank representing a specified number of shares in a foreign stock that is traded on a U. S. exchange. An ADR is listed in the U. S. ADRs pay dividends in U. S. dollars.

ADRs are traded on either the New York Stock Exchange (NYSE), American Stock Exchange ADRs are traded on either the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the National Association of Securities Dealers Automated Quotations (NASDAQ). The first ADR was introduced by J. P. Morgan in 1927 to allow U. S. investors to invest in share of a British department store. Today there are more than 2, 000 ADRs available representing shares of companies located in more than 70 countries.

How did ADRs start. . Due to complexities involved in buying shares of foreign How did ADRs start. . Due to complexities involved in buying shares of foreign countries. These complexities involved trading at different prices and differing currency values. So U. S. banks (acting as depositories) simply purchase a bulk lot of shares from the foreign company. This bulk lot is then bundled into groups and re-issued on NYSC, NASDAQ and AMEX.

Then. . In return, the foreign company provides detailed financial information to the sponsor Then. . In return, the foreign company provides detailed financial information to the sponsor or depository bank. The depository bank sets the Ratio of ADRs per actual share of the foreign company. - For example. 10 shares of the foreign company may be equal to 1 ADR. So Ratio is pegged at 10: 1

 The ratio, typically called “ADR Ratio” could be less than or greater than The ratio, typically called “ADR Ratio” could be less than or greater than 1 This ratio is set in such a way that an ADRs price is high enough to show substantial value, yet low enough to make it affordable for individual investors.

Pricing of an ADR Let us take an example – Suppose a recent boom Pricing of an ADR Let us take an example – Suppose a recent boom in the popularity of Bloody Mary drinks has increased the prospectus for the vodka industry. Russian Vodka Ltd. wants to list shares on the NYSE to gain exposure of the US market and to tap into the growing demand for vodka. Russian Vodka Ltd. , already trades on the Russian Stock Exchange at 127 Russian roubles. This is equivalent to US $4. 58.

 Now, a US bank purchases 30 million share of Russian Vodka Ltd. And Now, a US bank purchases 30 million share of Russian Vodka Ltd. And re-issue them in the US at a ratio of 10: 1 This means that each ADR you purchase is worth 10 shares on the Russian Stock Exchange. A quick calculation tells us that each ADR should have an issue price of US $45. 80 (US $ 4. 58 per share x 10 shares) – since 10 shares equal to 1 ADR Once an ADR is priced and sold, its subsequent price is determined by supply and demand factors, like an ordinary share.

Risk to Investors Here are some risks that investors should consider: Political Risk : Risk to Investors Here are some risks that investors should consider: Political Risk : The government in the home country of the ADR is not stable. Exchange Rate Risk : Stability of the home country’s currency needs to be assessed as well. If the country’s currency is devalued, it will trickle down your ADR. This will result in big loss, even if the company had been performing well.

 Inflationary Risk : This is an extension of the exchange rate risk. Currency Inflationary Risk : This is an extension of the exchange rate risk. Currency of a country with high inflation becomes less and less valuable each day. This can be a big blow to a company’s business due to reduced purchasing power and will reflect on its share price.

Types of ADR Level I Sponsored Level II Unsponsored Level III TYPES Types of ADR Level I Sponsored Level II Unsponsored Level III TYPES

1. Unsponsored ADR Unsponsored shares trade on the over-the-counter (OTC) market. These shares are 1. Unsponsored ADR Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depository bank. Unsponsored ADRs are often issued by more than one depository bank.

2. Sponsored Level I ADRs (“OTC” facility) Level I depository receipts are the lowest 2. Sponsored Level I ADRs (“OTC” facility) Level I depository receipts are the lowest level of sponsored ADRs that can be issued. When a company issued sponsored ADRs, it has one designated depository who also acts as its transfer agent. This is the most convenient way foreign company to have equity traded in the US. Level I shares can only be traded in OTC market and the company has minimum reporting requirements with the U. S. (SEC).

3. Sponsored Level II ADRs (“Listing” facility) Level II depository receipt programs are more 3. Sponsored Level II ADRs (“Listing” facility) Level II depository receipt programs are more complicated for a foreign company. When a foreign company wants to set up Level II program, it must file a registration statement with the SEC and is under SEC regulation. This type of ADR is listed on U. S. Stock Exchange. If the company fails to meet the exchange’s listing requirements, it may be de-listed and forced to downgrade its ADR program to Level I.

4. Sponsored Level III ADR’s(“offering” facility) This is the most prestigious of the three 4. Sponsored Level III ADR’s(“offering” facility) This is the most prestigious of the three types of ADRs and is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U. S. companies. Setting up a Level III program means that the foreign company is not only taking steps to permit shares from its home market to deposited into ADR program and traded into the U. S. ; it is actually issuing shares to raise capital.

ADR Termination Most ADR programs are subject to possible termination. Termination of the ADR ADR Termination Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depository receipts, and a subsequent delisting from all exchanges where they trade. Owners of the ADRs are typically notified in writing at least 30 days prior to a Termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the receipts, or do nothing.

Advantages of ADR 1. Access to growth markets Ø Many international markets, especially emerging Advantages of ADR 1. Access to growth markets Ø Many international markets, especially emerging markets, have higher GDP growth rates than the U. S. and Europe. Ø While the American stocks in one’s portfolio may be providing disappointing returns, holding some ADRs could potentially, provide you with better prospectus. Ø After all, one of the most basic lessons of investing is to ensure that you are adequately diversified.

2. Benefit for currency swings Ø Holding ADR’s can result in favourable currency conversions 2. Benefit for currency swings Ø Holding ADR’s can result in favourable currency conversions for dividends and other cash contributions. 3. Cost Effective Ø ADRs are an easy and cost effective way to buy shares in foreign company. They save money by reducing administrative cost and avoiding foreign taxes on each transaction. 4. More US exposure Ø Foreign entities favour ADRs because they get more US exposures, allowing them to tap into the wealthy North American equity markets.

Disadvantages of ADR 1. Foreign exchange risk Ø It is important to bear in Disadvantages of ADR 1. Foreign exchange risk Ø It is important to bear in mind that although your investment is valued in US dollars, and dividends are paid in that currency, the underlying investment is still exposed to foreign exchange fluctuations which can significantly increase the overall volatility of your financial return. 2. Selection Choice Ø Unfortunately, not every foreign company makes it stock available through this method, often because they do not feel it as necessary to access US markets in this way.

3. Illiquidity Ø Even if a company does offer this type of instrument, trading 3. Illiquidity Ø Even if a company does offer this type of instrument, trading may be thin (especially if the company is not well -known in the US) and, as a result, it could be difficult to either acquire or dispose of the investment in accordance with your desired timelines. Accordingly, these investments may not be suitable unless you are looking to hold them for the long-term. 4. Additional Fees Ø The holding vehicle for the underlying shares incurs a number of incremental expenses in managing the entire process, compared to regular stocks, and will pass these on to the investors- usually by deducting them from dividends.