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What is an 'Unsponsored ADR'

An unsponsored ADR is an American depositary receipt (ADR) issued by a depositary bank


without the involvement or participation - or even the consent - of the foreign issuer whose
stock underlies the ADR. The issuer therefore has no control over an unsponsored ADR, in
contrast to a sponsored ADR where it retains control. Unsponsored ADRs are usually
established by depositary banks in response to investor demand. Shareholder benefits
and voting rights may not be extended to the holders of these particular securities.
Unsponsored ADRs generally trade over-the-counter (OTC) rather than on United States
exchanges.

DEFINITION of 'Sponsored ADR'


An American depositary receipt (ADR) issued by a bank on behalf of the foreign company
whose equity serves as the underlying asset. A sponsored ADR creates a legal relationship
between the ADR and the foreign company, which absorbs the cost of issuing the
security. Unsponsored ADRs can only trade on the over-the-counter market, while
sponsored ADRs can be listed on major exchanges.

What is a 'Global Depositary Receipt - GDR'


A global depositary receipt (GDR) is a bank certificate issued in more than one country
for shares in a foreign company. The shares are held by a foreign branch of an international
bank. The shares trade as domestic shares but are offered for sale globally through the
various bank branches. A GDR is a financial instrument used by private markets to raise
capital denominated in either U.S. dollars or euros.

BREAKING DOWN 'Global Depositary Receipt - GDR'


A GDR is very similar to an American depositary receipt (ADR). GDRs are called EDRs
when private markets are attempting to obtain euros.

GDRs may be traded in multiple markets, generally referred to as capital markets, as they
are considered to be negotiable certificates. Capital markets are used to facilitate the trade
of long-term debt instruments, primarily for the purpose of generating capital. GDR
transactions in the international market tend to have lower associated costs than some
other mechanisms that can be used to trade in foreign securities.
Shares Per Global Depositary Receipt
Each GDR represents a particular number of shares in a specific company. A single GDR
can represent anywhere from a fraction of a share to multiple shares, depending on its
design. When multiple shares are involved, the receipt value shows an amount higher than
the price for a single share. Depository banks manage and distribute various GDRs and
function in an international context.

Trading of Global Depositary Receipt Shares


Companies issue GDRs to attract interest by foreign investors, providing a lower-cost
mechanism in which these investors can participate. These shares are traded as though
they are domestic shares, but they can be purchased in an international marketplace. Often,
the actual shares that are allocated within the GDR are put in the possession of a custodian
bank as transactions are processed, ensuring both parties a level of protection while
facilitating participation.

The purchase and sale of GDRs are managed through brokers representing the buyer,
generally from the home country, and seller within the foreign market. The actual purchase
of the assets are multi-staged, involving a broker in the investor's home, a broker located
within the market associated with the company that has issued the shares, a bank
representing the buyer and the custodian bank.

If an investor desires, GDRs can be sold through their brokers as well. They can be sold as
is on the proper exchanges, or they can be converted into regular stock for the company.
Additionally, they can be canceled and returned to the issuing company.

What are 'Currency Futures'


Currency futures are a transferable futures contract that specifies the price at
which a currency can be bought or sold at a future date. Currency futures
contracts are legally binding and counterparties that are still holding the contracts
on the expiration date must trade the currency pair at a specified price on the
specified delivery date. Currency future contracts allow investors
to hedge against foreign exchange risk.

BREAKING DOWN 'Currency Futures'


Because currency futures contracts are marked-to-market daily, investors can
exit their obligation to buy or sell the currency prior to the contract's delivery date.
This is done by closing out the position. The prices of currency futures are
determined when the contract is signed, just as it is in the forex market, only and
the currency pair is exchanged on the delivery date, which is usually some time
in the distant future. However, most participants in the futures
markets are speculators who usually close out their positions before the date of
settlement, so most contracts do not tend to last until the date of delivery.
Difference Between Spot Rate and Futures Rate
The currency spot rate is the current quoted exchange rate that a currency pair
could be bought or sold. If an investor or hedger conducts a trade at the currency
spot rate, the exchange of the currency pair may take place at the point at which
the trade took place or shortly after the trade. Since currency forward rates are
based on the current currency spot rate, currency futures could be substantially
affected if currency spot rates change.

If the spot rate of a currency pair increases, the futures prices of the currency
pair have a high probability of increasing. On the other hand, if the spot rate of a
currency pair decreases, the futures prices has a high probability of decreasing.

Currency Futures Example


For example, assume hypothetical company XYZ, which is based in the United
States, is heavily exposed to foreign exchange risk and wishes to hedge against
its projected receipt of 125 million euros in September. In August, company XYZ
could sell futures contracts on the euro for delivery in September, which have a
contract specification of 125,000 euros. Therefore, company XYZ would need to
sell 1,000 futures contracts on the euro to hedge its projected receipt.
Consequently, if the euro depreciates against the U.S. dollar, the company's
projected receipt is protected. However, the company forfeits any benefits that
would occur if the euro appreciates.

Currency option
In finance, a foreign exchange option (commonly shortened to just FX option or currency option)
is a derivative financial instrument that gives the right but not the obligation to exchange money
denominated in one currency into another currency at a pre-agreed exchange rate on a specified
date.[1] See Foreign exchange derivative.
The foreign exchange options market is the deepest, largest and most liquid market for options of
any kind. Most trading is over the counter (OTC) and is lightly regulated, but a fraction is traded on
exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago
Mercantile Exchange for options on futures contracts. The global market for exchange-traded
currency options was notionally valued by the Bank for International Settlements at $158.3 trillion in
2005.[citation needed]

Example[edit]

For example, a GBPUSD contract could give the owner the right to sell 1,000,000 and buy
$2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000
USD per GBP (or GBP/USD 2.00 as it is typically quoted) and the notional amounts (notionals) are
1,000,000 and $2,000,000.

This type of contract is both a call on dollars and a put on sterling, and is typically called a GBPUSD
put, as it is a put on the exchange rate; although it could equally be called a USDGBP call.

If the rate is lower than 2.0000 on December 31 (say 1.9000), meaning that the dollar is stronger
and the pound is weaker, then the option is exercised, allowing the owner to sell GBP at 2.0000 and
immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 GBPUSD
1.9000 GBPUSD) 1,000,000 GBP = 100,000 USD in the process. If instead they take the profit in
GBP (by selling the USD on the spot market) this amounts to 100,000 / 1.9000 = 52,632 GBP.

What is the 'Eurocurrency Market'


The eurocurrency market is the money market in which currency held in banks outside of
the country where it is legal tender is borrowed and lent by banks. The eurocurrency market
is utilized by banks, multinational corporations, mutual funds and hedge funds that wish to
circumvent regulatory requirements, tax laws and interest rate caps often present in
domestic banking, particularly in the United States. The term eurocurrency has nothing to
do with the euro currency or Europe, and the market functions in many financial centers
around the world.

BREAKING DOWN 'Eurocurrency Market'


Interest rates paid on deposits in the eurocurrency market are typically higher than in the
domestic market because the depositor is not protected by domestic banking laws and does
not have governmental deposit insurance. Rates on eurocurrency loans are typically lower
than those in the domestic market for essentially the same reasons: banks are not subject
to reserve requirements and do not have to pay deposit insurance premiums.
Background
The eurocurrency market originated in the aftermath of World War II when the Marshall Plan
to rebuild Europe sent a flood of dollars overseas. The market developed first in London as
banks needed a market for dollar deposits outside the United States. Dollars held outside
the United States are referred to as eurodollars, even if they are held in Asian markets such
as Singapore or Caribbean markets such as Grand Cayman.

The eurocurrency market has expanded to include other currencies such as the yen and the
British pound whenever they trade outside of their home market. However, the eurodollar
market remains the largest.

Size
The eurodollar trades mostly overnight, although deposits and loans out to 12 months are
possible. Even though deposits are domiciled off-shore, much of the activity actually takes
place in New York trading rooms while being booked into off-shore accounts. A 2016 study
by the Federal Reserve Bank indicated the average daily turnover in the eurodollar market
was $140 billion. Transactions are usually for a minimum of $25 million, and can top $1
billion in a single deposit.

Eurobond Market
There is an active bond market for companies and financial institutions to borrow in
currencies outside of their domestic market. The first such bond was by the Italian company
Autostrade in 1963. It borrowed $15 million for 15 years in a deal arranged in London and
listed on the Luxembourg stock exchange. In 2014, Apple was able to borrow $3.5 billion in
the eurodollar bond market.

One of the key economic decisions a nation must make is how it will value its

currency in comparison to other currencies. An exchange rate regime is how a

nation manages its currency in the foreign exchange market. An exchange rate

regime is closely related to that country's monetary policy. There are three

basic types of exchange regimes: floating exchange, fixed exchange, and

pegged float exchange .

International exchange system


The Floating Exchange Rate
A floating exchange rate, or fluctuating exchange rate, is a type of exchange

rate regime wherein a currency's value is allowed to fluctuate according to the

foreign exchange market. A currency that uses a floating exchange rate is

known as a floating currency. The dollar is an example of a floating currency.

Many economists believe floating exchange rates are the best possible

exchange rate regime because these regimes automatically adjust to economic

circumstances. These regimes enable a country to dampen the impact

of shocks and foreign business cycles, and to preempt the possibility of

having a balance of payments crisis. However, they also engender

unpredictability as the result of their dynamism.

The Fixed Exchange Rate


A fixed exchange rate system, or pegged exchange rate system, is a

currency system in which governments try to maintain a currency value that is

constant against a specific currency or good. In a fixed exchange-rate system, a

country's government decides the worth of its currency in terms of either a

fixed weight of an asset, another currency, or a basket of other currencies.

The central bank of a country remains committed at all times to buy and sell

its currency at a fixed price.


To ensure that a currency will maintain its "pegged" value, the country's

central bank maintain reserves of foreign currencies and gold. They can sell

these reserves in order to intervene in the foreign exchange market to make

up excess demand or take up excess supply of the country's currency.

The most famous fixed rate system is the gold standard, where a unit of

currency is pegged to a specific measure of gold. Regimes also peg to other

currencies. These countries can either choose a single currency to peg to, or a

"basket" consisting of the currencies of the country's major trading partners.

The Pegged Float Exchange Rate


Pegged floating currencies are pegged to some band or value, which is either

fixed or periodically adjusted. These are a hybrid of fixed and floating regimes.

There are three types of pegged float regimes:

Crawling bands: The market value of a national currency is permitted to

fluctuate within a range specified by a band of fluctuation. This band is

determined by international agreements or by unilateral decision by a central

bank. The bands are adjusted periodically by the country's central bank.

Generally the bands are adjusted in response to economic circumstances and

indicators.

Crawling pegs:A crawling peg is an exchange rate regime, usually seen

as a part of fixed exchange rate regimes, that allows gradual depreciation or


appreciation in an exchange rate. The system is a method to fully utilize the

peg under the fixed exchange regimes, as well as the flexibility under the

floating exchange rate regime. The system is designed to peg at a certain value

but, at the same time, to "glide" in response to external market uncertainties.

In dealing with external pressure to appreciate or depreciate the exchange

rate (such as interest rate differentials or changes in foreign exchange

reserves), the system can meet frequent but moderate exchange rate changes

to ensure that the economic dislocation is minimized.

Pegged with horizontal bands:This system is similar to crawling bands,

but the currency is allowed to fluctuate within a larger band of greater than

one percent of the currency's value.

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