Products & Their RisksQuestion 56 of 398
An investor buys an ADR of a European company. Even if the company performs well, the investor's dollar return can be reduced by:
a.Reinvestment risk
b.Call risk
c.Prepayment risk
d.Currency (exchange-rate) risk
Explanation
Because the ADR's value is tied to a foreign stock, a decline in the foreign currency relative to the dollar can lower the investor's dollar-denominated return even if the company does well. Reinvestment, call, and prepayment risks apply to bonds, not this equity currency exposure.
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