Final answer:
The correct answer is option b. Each ADR represents a multiple of the underlying foreign stock's shares, not a fixed amount; the ratio varies and is important for investors to check when considering ADR investments.
Step-by-step explanation:
An ADR, or American Depositary Receipt, is a financial instrument that allows investors to hold shares in foreign companies. Each ADR represents a multiple of the underlying foreign stock, and the exact ratio of ADR to foreign stock shares can vary. This mechanism provides an essential bridge for domestic investors to own foreign stocks without dealing with cross-border legalities and facilitates the trading of those shares on U.S. exchanges.
ADRs can have different ratios for a variety of reasons, such as to adjust the price of the ADR to a level that is more attractive to individual investors, or to reflect the value of the underlying company in comparison to similar domestic companies. Some ADRs may represent one share of the foreign stock, others may represent a multiple, and in some cases, it may even be less than one share. Investors interested in ADRs should look up the specific ratio for the ADRs they are considering to understand how many foreign stock shares they represent.
The Correct Option
Given the following options:
- a. 1
- b. a multiple
- c. 100
- d. ADRs have nothing to do with foreign stocks.
The correct answer is b. a multiple.